5 Ways to Reduce Debt

It’s not difficult to reduce your debt. It’s a matter of getting into a habit to always spend less than you make. So that eventually, not only are you reducing your debt, but you’ll also be saving for your future.

Where do you spend your money?

Before you can reduce your debt, you need to know where you’re spending your money. Keep track of your spending and categorize them into Food, Recurring Bills, Entertainment, and so on. Most importantly, add in a column for “needs or wants”.

You can reduce or even eliminate items marked as wants if you’re pressed on reducing your debt.

Forbes conveniently created a list of apps to help you track your spending.

Here are more tips on how to reduce your monthly spending.

Set financial goals

pink piggy bank

Photo Credit: kenteegardin from SeniorLiving.org via Compfight cc

Where do you want to be 30 years from now? Let’s say your goal is to reach $1,000,000 in 30 years. The earlier you start saving and investing, the easier it is to reach that goal. However, debt will slow down your progress because you have to pay interest.

So, the faster you repay your debt, the sooner you get to save and invest. It only makes sense to let your debt accumulate if you can guarantee higher returns from your investments.

For example, if you can earn 10% on your investments, you can repay your debt that costs you a 5% interest at a lower pace. In this case, you’d be using leverage to grow your assets.

However, whether to use debt to invest really depends on whether you sleep well with the debt that you have and how sure you are of generating high enough returns from your investments.

Small payments can add up

Make payments towards repaying your debt as soon as you get your paycheque. If you can eliminate a regular spending or two from your “want” list, that’d help, too. Every small payment counts!

Big savings can make a big difference

If small savings add up, big savings can make an even bigger impact on reducing your debt. For example, if you and your spouse live in a house and your children have grown up and moved out, you might consider downsizing to an apartment. This will not only reduce maintenance costs but could also free up capital so that you can invest for income.

However, it’s generally not recommended to invest your money all at once. You should stick to your forte if there’s a type of investment that you have lots of knowledge and investment already. From there you can spread out into other investments you’re interested in.

Investments include savings accounts, GICs (in Canada) and CDs (in the U.S.), bonds, stocks, ETFs, and rental properties.

Here are tips on how to save more money.

Pay off high-interest rate loans first

Always pay off your credit cards first. They probably have the highest interest among your debt. In fact, it’s best to pay off your credit card balance every month so that no interest is charged.

Here are some more resources to help you manage your debt:

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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