How To Achieve Debt Reduction

Any consumer, with any level of debt, would be relieved to experience debt reduction. After all, reducing debt would appear, on the face of it, to improve your financial position, and probably ease a lot of worries at the same time.

However, there are many ways to achieve debt reduction, and not all are necessarily beneficial to you in the long run. If you opt for a method that damages your credit report, for example, you could be paying more for all your borrowing in the future, at least for the next few years.

There are many ways to approach reducing your debt level, and different consumers have varying ideas of what they have in mind when they talk of debt reduction. Some will be thinking in terms of a negotiated settlement with creditor agreement; others may just be thinking they want a future with less debt that they have at present.

Looked at simply, a person's financial position consists of 4 elements, in the same way that a business does. There are, of course, many more factors to take into account, but it is worth considering the raw basics. Those 4 elements come in 2 pairs: assets and liabilities; income and expenditure. The liabilities are the debts, whether overdue or not, so it is the liabilities that a consumer wants to reduce when they think of debt reduction.

If someone wants to reduce their debt, the other 3 factors are all relevant, and could be critical. If they are going to avoid debt negotiation, then the monthly income and outgoings become the key to possible success in their ambitions.

The First Steps To Debt Reduction

Many people seem to focus entirely on the debt itself when they consider how to reduce it. That is not in itself the way to debt reduction in the long term. It is necessary to focus on all the 4 elements mentioned above, not just the liabilities. Let us take a look at the other 3 elements, and see how they can influence and impact on your debt reduction aims:

Income

Take the time and trouble to think long and hard about your income. It is, after all, a key element in your financial situation; some would say it is the most important element. With proper financial management, expenditure and liabilities, as well as assets, should be related to that income. It is when that relationship goes askew that debt problems arise in the long run. Debt should always be kept well within the means of the income.

What can you do about your income? Is that not what you're stuck with every month? In the immediate term, that may be so, but are you sure there is nothing to do to change that? Can you not get another part-time job to help you wipe out the debt? That extra money could go straight into debt reduction, and will improve your financial position accordingly. It may be tough, but if you're in a difficult debt position, it requires tough action to get out of it. Earning extra is the most positive way of dealing with the problem.

How about improving your chances of getting a better full time job? Or advancing in your present job? Whatever your age you can learn new skills; skills that will enhance your earning power. And how about your tax situation? Are you sure the tax man does not owe you money?

All these things are worth examining, as improving your income will have long term benefits, and help you with debt reduction.

Expenditure

If you have a debt problem, it is likely that your expenditure each month has, for whatever reason, got out of synch with your income. Now you have taken a close look at your income, and hopefully decided to do something to maximise it, you should take a critical look at your expenditure.

List out every item of expenditure you have each month and rank them in accordance with their necessity. You have rent or mortgage, and that should be at the top of the list. But can you move somewhere cheaper, to save yourself some money? Look at each item in the list, and ask yourself critically: do I need to spend this at all? Or could I reduce the amount by cutting out a few luxury items; or by eating at home more and cooking myself; or by having a cheaper vacation or missing it for a year or two. All these are possible areas where you can make savings and chip into your debt level.

Assets

It is worth getting into the habit of totting up your assets at least once a year. That way, you can see if your underlying position is improving or deteriorating. It is not just your total assets that are important, but your net assets. That is, assets less liabilities. If you have assets of $100,000 and liabilities of $110,000 you have negative assets, and your financial position is not good.

If you do have positive net assets, and they are high, consider whether it will be beneficial to realise some of those assets to pay off some debts. If you have a high equity level in your home, for example, you can consider moving down market, or to a cheaper geographical location. Or, you could use the home as security to get a low interest consolidation loan, thereby reducing your monthly outgoings, and enabling you to set aside money each month to build your assets, thus enabling cash purchases in the future instead of more loans and the threat of debt problems.

Only when you have considered all these elements of your finances fully should you decide whether or not you will benefit from debt consolidation or debt negotiation.

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