Steps to Aggressive Debt Reduction

Debt reduction is a different proposition from debt management. Debt reduction is about getting out of debt as fast as possible. Debt management will help you get out of debt as well, but at a slower pace as you manage your debt, moving it around and slowly paying it off. If you are interested in getting out of debt faster, and likely paying less in overall interest fees to boot, agressive debt reduction might be the answer.

Step 1: Figure out how much you can put toward debt reduction each month

It is said that about 10% to 15% of a household income goes to waste every month. This is money spent on unnecessary things that represent your money just frittering away. The first thing you need to do is sit down and honestly figure how much you can devote to debt reduction each month. Figure your income, and then figure out how much you spend (count minimum payments on all of your loans/credit cards as part of this number). Allowing some money for savings, decide how much you can put toward debt reduction, whether it is as little as $75 or as much as $500.

Step 2: Order your debts

Next, make a list of your monthly debt payments and their minimum payments. You can also note their interest rates if you wish. Put them in a "pay off" order. You do this either by starting with the smallest debt and ordering through the largest, or by going by interest rate (highest interest rate first). My personal feeling is to pay off the smallest debt first. This way you see real progress being made, and you are encouraged to keep on with your debt reduction plan. Here's how my hypothetical list might look:

1. $700 on credit card, minimum payment $15
2. $1,200 on credit card, minimum payment $35
3. $2,400 furniture store loan, minimum payment $60

If you have more debt, obviously, the list would keep going.

Step 3: Start paying down your debts

Take the amount you came to in Step 1 and apply it to the first debt on your list. Let's say that you can pay $125 a month toward debt reduction. You pay that $125 beyond the minimum. So you would pay $140 each month on debt #1 (15 + 125). In about five months, that debt is gone.

Step 4: Move on to the next

When your first debt is paid off, move to the second debt, and pay the whole amount you were paying on the first debt beyond your minimum payment. So you take that $140 from the first and apply it to the second debt. So you are putting $175 (35 + 140) toward debt reduction now, without actually increasing the amount you are paying each month.

You can see that as you continue reducing your debt, it begins to move faster. By the time I get to my third debt things are going much faster. And in less than two years my three debts are paid off. How long it takes you depends on how much extra you can put in, and how much debt you have.