According to some estimates, every household, on average, wastes 15% of its income (if you make $4,000 a month, this amounts to $600). This wasted money disappears into needless things that do not offer any real and lasting value. Things like lattes and money for useless knick-knacks that do nothing more than gather dust. Impulse buys and “great deals” that are “too good to pass up” — even if it isn’t something you need.
What could you be doing with this wasted money instead? Well, if you have debt, you can use it as part of a debt reduction plan.
Aggressive debt reduction is a way of planning to use your wasted money each month in order to get out of debt and then start saving. Here’s how it works:
Step one: What’s your budget?
The first think you need to do is take an honest look at your income and your expenses. How much do you make? What do you spend your money on? Take a couple of months and write down everything you spend your money on. Tedious, I know. But necessary. I keep track of my money using a computer program. It makes things easier to keep track of, and you can categorize things as “snacks” or “unnecessary.”
After keeping track, sit down and go through everything. Do you have any money left over at the end of the month? How much have you been “wasting” on things you don’t need? Figure out which things you don’t need and add that amount up. That is your “waste.”
Write down the amount of money you waste, plus whatever you have left at the end of the month. Now we’re going to take that money and get it to work for you.
Step two: What are your debts?
In the first step, you should also have included minimum payments you make to your creditors. Now, get a list of your debts out, and write down your balances, along with the minimum payments, on a piece of paper. I like to order them smallest debt to largest debt. Be honest.
Your list may be something like this:
- Credit card: $2,500 Min. $35
- Credit card: $3,300 Min. $42
- Car loan: $9,700 Min. $215
- Private student loan: $11,100 Min. $150
Step three: Take your waste and apply it to your debt
In order for this to work, you will have to change some things about your lifestyle. You have to make a decision to stop wasting your money for this debt reduction plan to work.
Take the amount you wrote down at the end of step one. Take 25% of it and set it aside as savings (preferably in a high-yield savings account). Take the other 75% to use for your debt reduction plan. For example, if that number is $200, your savings amount would be $50 and your debt reduction plan amount is $150. The amount isn’t that important. What is important is that you are planning a lifestyle change.
When you go to make a payment on the first debt, add that $150 to the $35 minimum for a total payment of $185. Keep paying the minimum on all your debts. This will help you get the ball rolling. If you find you can contribute more each month, do so.
After the first debt is paid off, move on to the next. You can see why I like doing the lowest balance first. It is encouraging to pay off a debt, and the smaller one will be paid off faster, in general. Take that entire $185 and apply it to the next debt, so the payments on your second debt would be $227. Pretty soon you’ll be on a role.
And, once your last debt is paid off, take the entire amount and put it into savings each month.
This is a guest post by Miranda Marquit. Miranda is an editor for DestroyDebt [1], an informational Web site about debt consolidation. She also writes about personal finances on Yielding Wealth [2].