Debt Reduction in 3 Easy Steps

Yellow Piggy BankDebt reduction is simple. Basically, you have to create excess cash flow which you can then use to pay down your debt. Here are the three steps to do this:

  1. Stop spending.
  2. Eliminate costs.
  3. Increase income.

Let’s look at each of these in more detail.

First, you have to stop spending so much money. I don’t mean you have to stop buying food. But you have to stop making impulsive purchases. You have to stop buying things you don’t need.

Continue spending money on what you need to live: food, shelter, clothing, etc. Just get a grip on your spending. A good way to do this is track every expense for an entire month.

I did this once and was shocked to see how much money was going to certain non-essentials (like Starbucks). When you see where your money is going, you will be able to cut the fat. Be ruthless.

Second, you must eliminate costs. More specifically, you must eliminate recurring costs. Here are common items that require you to pay a fee every month: cable television, cell phones, Internet access, gym memberships, clubs, associations, newsletters, insurance, etc.

Carefully examine every monthly expense you currently pay. Are you no longer using what you are paying for? Cancel the service. Are you paying too much? Call the company to get on a different plan that costs less.

If you spend just one hour doing this exercise, you will probably save at least $50 a month starting immediately. Often, you will save $100 a month or more.

Finally, you must increase your income. If you have a job, ask for a pay raise. More specifically, make yourself more valuable to the company, demonstrate that you are worth more than you’re currently making, then ask for a raise.

I got married when I was 20. I had no college degree. Prior to getting married, I had been working at a snowboard shop for $7 an hour. That just wasn’t going to cut it, so I began a job search before the wedding day. By the grace of God, I landed a job at Merrill Lynch working on 401(k) plans.

Within a period of about five years, I took my income from about $14,000 a year to $63,000 a year. So I know getting pay raises can be done. (And if you can’t get a pay raise in your current job, you can often make more money by switching jobs.)

But staying in your job isn’t necessarily the best course of action, no matter if you get a raise or not. You can easily start a part-time business. This will create additional cash flow and could quickly grow to replace your income.

Service businesses are usually fairly easy to start because they require very little start-up capital. There are many other options. But I won’t explain them here because they go beyond the scope of this article.

One last thing to consider. Look around your house for things that you can sell. Is there unused furniture in your basement? Tools or gadgets lying around in your garage that you no longer use? Toys, clothes, or other items you should part with?

Gather these items and have a garage sale. Sell the more valuable items by posting ads on Craig’s List. I recently sold a kitchen table and chairs this way. I had about eight people contact me in less than 24 hours. I pocketed $100 cash for about 20 minutes of my time.

Use the money from whatever you sell to pay down your debt even further.

These are the three ways I know of to create cash flow: stop spending, eliminate costs, and increase income. Steps one and two will create an immediate impact. But step three will create the biggest impact. So even though I encourage you to get a grip on your spending and eliminate costs, don’t get too hung up there. You will make much more progress if you find a way to increase your income.

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