Part of smartly managing debt includes reducing your debt level and maybe even getting out of debt completely.
It is important to use debt wisely and manage it appropriately within your current financial situation.
The University of Alabama’s Dr. Melissa Wilmarth offers some steps that will help you reduce your debt level.
- Step 1: Gather records and track spending. Pulling together your financial records will put all of your financial information in one place at the same time. Record all of your spending for a month (or longer) to see where your money is going. You may have your eyes opened to your financial behaviors.
- Step 2: Prioritize your budget. Make a list of your monthly expenses and then prioritize these expenses, ranking what is most important to you. What are the “must pay” items and items that you place a high value on? For items that are not a fixed expense amount, assign these items a maximum dollar amount. Review your expenses and priorities, as you may be able to take the lowest priority items off your budget completely and find areas where you can spend less.
- Step 3: Prioritize your debt repayment. Write down all of your debts, including the debt balances and interest rates. Make a goal to pay off one of your debts first, and make sure it is a goal you can accomplish. You may want to start with the debt with the highest interest rate or the debt with the lowest balance. Choose what works best for you and is most achievable for you. Focus on one debt at a time (while paying the requirements on all others), to build confidence and feel success along the way.
- Step 4: Include yourself as a bill. The only way you will increase your savings is to make sure it is a part of your budget. Include your savings as a line in your budget. It may have to start as a small amount, but, as you make progress paying off debt, you will be able to increase this amount to increase your personal savings.
- Step 5: Keep change in mind. Keep your debt repayment goals in mind as you adjust to changes in income. If you get a tax refund or a raise or a bonus at work, evaluate how much of it you should save and how much of it you should put toward debt repayment.
Debt repayment doesn’t happen overnight, but planning and small steps make it more achievable. Focus on the small accomplishments and how they contribute to your overall improved financial health.
Wilmarth is an assistant professor in the department of consumer sciences in UA’s College of Human Environmental Sciences.
