How To Get Out Of Debt
3 Debt Reduction Tips

It is a fact that whatever our level of income, we all tend to spend what we earn. The trouble is, when we spend more, we have to borrow more to make ends meet.

The debt reduction tips here will work regardless of your income, - you definitely don't need to be rich to get ahead.

If you are uncomfortable with the level of debt you have, then StreetLenders debt reduction tips are the solution. (NB: Getting more debt for good investment purposes is another topic for another day.)

Our tips for reducing debt comprise three simple steps:

1. QUARANTINE YOUR EARNINGS
   

2. STOP BORROWING
   

3. BUDGET
   

Lets look at each in turn:

Debt Reduction Tip No.1
QUARANTINE YOUR EARNINGS

But the first essential rule for reducing debt is to get complete control over the money that's coming in, and to shelter it from expenses and from the temptation to spend it.

Keep Your Income Account Separate
Many of us have a home equity loan, and it makes sense to have our income deposited there to reduce interest expenses whenever possible.

Alternatively, keep or establish a bank account which is exclusively used for receiving your income, and no other purpose.

Whichever account you use to receive income, it must NOT have debit or credit card access, and (apart from your home equity account), should be a credit-only account - no overdraft.

The most important point about this account, is that it is NOT used for your day-to-day spending.

Keep Your Spending Account Separate
Your bills and day-to-day spending should take place from a separate "Spending" account which is established just for that purpose, and is funded by you according to your budget.

The "Spending" account must NOT have any overdraw capacity, but can have debit card access so that you can pay for day-to-day budgeted expenses as needed.

Your Spending account should be topped up regularly, according to your budget, preferably weekly, so that not too much spending power is put in your way. You can even have you bank do this for your automatically. (Bank fees for this arrangement will be more than recovered by the loan interest you save if you follow these debt reduction tips).

So you see what we're doing here? - we physically separate your Income account from your Spending account. And your Spending account is only allowed to get enough funds to pay your living costs, worked out according to your budget

This greatly simplifies your discretionary spending decisions - if the money's not in your Spending account, you can't spend it! But of course your budget should ensure that you have enough available to spend what you need to on essentials.

Debt Reduction Tip No.2
STOP BORROWING

Use your credit card ONLY to pay essential bills (which have been included in your budget, so no problem there), and never carry a balance over from one month to the next.

Some will find that the only way to remove temptation is to stop using the credit card altogether - cut it up. That's probably unrealistic these days, but if that's what it takes for you to succeed.....do it!

Needless to say, acquiring any other loans of any sort, even (so-called) "interest-free" deals from retailers, and home loan equity re-draws must be avoided completely until your budget shows your debts are under control and reducing, or preferably eliminated completely.

Any future debt should ONLY be undertaken after you have revised your budget to ensure you have the funds, not only to meet the repayments, but also to ensure you have SURPLUS funds.

Debt Reduction Tip No.3
BUDGET

Starting out, when you have little money or assets, spending less than you earn is done by simply tracking money in and money out, and making sure there is something left over - a surplus.

Where you invest the surplus is of course, very important, and is beyond the scope of this discussion. Suffice to say, that if you have personal loans or other debts, the best place to invest any surplus money is usually in paying off debt. This can dramatically reduce interest costs, and get you "out from under" the crushing burden of debt.

As time goes by, using your cash surpluses in this way, will eventually see you accumulate assets and wealth in investments which will produce their own income (such as shares, or property), and greatly accelerate this process for you.

So finding a surplus in your cash flow is critical to you being able to reduce debt and get ahead. And that's what a budget is for.

Note: Everyone's situation is different, but if you truly can't find a surplus in your budget, these debt reduction tips won't work. There are other debt reduction solutions which are not discussed here.

While there are many approaches to personal budgeting, we recommend the best approach as the one which takes the least amount of work. Regularly undertaking tedious arithmetic is not the most motivating way to track your wealth!

Keep It Simple: Budget Annually
So with that in mind, don't try to budget daily or even monthly, because your motivation will fall away over time, and your finances will fall into disrepair again. ANNUALISE your budget, and then simply divide your annual spending amount by 52, this becoming the weekly transfer amount to your Spending account outlined in Tip Number 1.

You will have to make the initial one-time effort of identifying all your spending requirements to ensure you have enough to live on, and to find a surplus in your cash flows to be used for paying down debt. And of course when your circumstances change, your budget will need to be revised.

After the initial set-up, revising a family budget will usually only take a few minutes.

This is the approach we adopted in designing our budget sheets which can be obtained for free, here. One sheet gives an example budget to follow, the other is blank for you to fill in. It usually takes about 30 to 45 minutes to fill in, and can get you on track to reducing debt immediately, if you follow these debt reduction tips.

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