Back to Basics: Reduce debt

The surest way to work toward saving money each month is to reduce debt. Here are some ways to do that ….

Being in debt simply means that at one point you borrowed money to fund some purchase, and are now paying it back over time.  (For the purpose of this post, I'm not going to lump in “profitable” or “good” debt that is used to make money reliably for the borrower through some other vehicle.)  The debt can be, for example, a student loan, a mortgage, a car loan, a title loan, a pawn ticket, or a credit card balance.  There are many reasons why people go into debt, and they're all not bad reasons.  Funding a college education can be a good use of debt for many people.  Buying a house with debt that is, and will likely be, affordable can be a good use of debt for many people.

Buying depreciating, or even consumable, assets with debt often is not a good use of debt in many situations.  Overconsumption, or living beyond one's means, is usually a bad use of debt.  Buying a car with a loan, though sometimes unavoidable, is usually not as good as paying for it in full.

Then there are the times when people are thrust into massive debt because of a financial catastrophe, like serious illness in the family, job loss, an injury, or a lawsuit.

Reduce debt to supercharge your way ahead

Whatever the reason for the debt, it must be repaid, and the longer it takes to be repaid, the higher the amount of interest that must be repaid in addition to the amount borrowed.  Carrying debt means sacrificing future income to the debt, as well as any passive income that this future income would earn.  In this light, it makes sense to pay off debts as quickly as possible without opening up the rest of your finances to undue risk.

Here are a few things to consider as you reduce debt:

• Not in debt?  That's great!  Stay out of debt.  With the economy going downhill, jobs become less reliable.  Now is an especially bad time to take on more debt, or to start taking on debt.  The consequences of getting caught jobless will generally be more severe until the economy recovers, which could take years.  (Yes, years!)  Work on doing the little money-saving things and protecting your income streams so that you don't have to resort to debt.
• Read books on how to get out of debt.  There are many books out there on getting out of debt.  If you need to be dragged kicking and screaming to face your problem, then Larry Winget's You're Broke Because You Want To Be is good for slapping you upside the head and getting you on track.  For a less abusive, shorter, and equally powerful message on the philosophy of debt, check out Michael Mihalik's Debt Is Slavery.  For tried-and-true detailed steps on dealing with creditors yourself as opposed to hiring a debt consolidation company, look at Harrine Freeman's How to Get Out of Debt.
• Read blogs written by people getting out of debt.  If you're in debt, you're not alone.  No Credit Needed is one of the originals who has gotten out of debt and still blogs about debt reduction.  Paid Twice, Blogging Away Debt — there are dozens, if not hundreds, of blogs written by people whose primary focus is getting out of debt.  Learn from them.  Connect with them.  Interact with them!  Check out the Carnival of Debt Reduction to see what's going on.
• Get support and encouragement as you get out of debt.  You don't have to go through it alone.  Check out financial forums and contribute to the discussions.  Ask questions, ask for advice.  Or start a blog about your debt reduction as a way to solidify your resolve to get out of debt and to possibly make a little money in the process!
• Develop a plan for debt repayment.  Our situation is relatively easy: we just have a mortgage, so planning involves keeping up with the mortgage payments and evaluating whether to throw more at the mortgage.  If your situation is more complicated than this, check out this slick debt reduction calculator or get organized with something like the No Credit Needed Notebook.
• Be careful about stretching yourself too thin.  It is likely a good idea to have a small “emergency fund” built up as a buffer against taking on more debt.  If you're starting with absolutely no savings and have debt, then it's probably wise to trade off a little debt reduction for building up an emergency fund.  Once the emergency fund is built up, then it's “safer” to throw more money at the debt reduction.
• Pay off the smallest card first?  Pay off the highest-interest card first?  For the most part, it doesn't really matter.  As long as the balances continue to go down, they'll eventually all go away.  Attacking the highest interest-rate loan first will mean less interest paid over the long run, but attacking the lowest-balance loan first gives the psychological satisfaction of “slaying a dragon” and might be exactly what's needed.
• When raising money to reduce debt, grab the low-hanging fruit first.  Some expenses are easier to cut than others.  Holding a yard sale for things you haven't used in years can raise money by getting rid of things you probably forgot you had.  Other things that you're not using, like 500 TV channels in foreign languages, might not be missed either.  Downsizing or simplifying can be fairly painless, too, and help you to spend less than you earn so that you can reduce your debt.
• Build up speed.  The good news with debt reduction is that you regain some of your financial muscle each time you pay off a loan.  That's a payment you don't have to make anymore.  Flex that extra muscle and throw that payment at the next debt in line, and it will go away faster.
• Celebrate your progress.  Just like getting into debt (usually) doesn't happen overnight, getting out of debt doesn't happen overnight, either.  It can take years, and celebrating along the way (say, for every $1,000 down or for each credit card paid off) reward yourself with something nice.