How to Reduce Debt - The First Step

Work out exactly How Much Debt You Owe

If you are serious about reducing and eventually eliminating your debt, the first thing to do is to determine exactly what your current debt level is. Unless you know exactly how much debt you have, how can you make a plan to get rid of it?

Now this might seem very obvious and when I ask most people they often tell me that they know exactly how much money they owe. However, more often than not it comes as a big surprise to people when they actually sit down with a pen and paper to work out exactly what their current levels of debt actually are.

It is so easy to lose track of who you owe money to because most of us do not keep accurate records of what money we owe. So it is only when you t the time to identify each debt owing and then add up all the individual debts (including interest) that you actually gain an accurate picture of how much you owe.

Be prepared for a surprise because that is what happens most often. Many of us really have no idea how much money we owe. So this step can be a little painful and that is why most people try to avoid it. However, it will give you a really good idea why you are struggling to make ends meet each week and where all your hard earned money actually goes.

So step number one on your debt management program is to address the situation.

It is only after you have done this that you will be able to create a budget that will help you move towards eliminating debt from your life.

Many of us detest budgets because we feel that we are constrained by them. I used to think the same as well and I'll admit that sticking to a budget initially was quite uncomfortable. However, what I have now found is that once I got used to it (it always takes a while to get used to any change), I find a budget quite freeing and empowering. Why? Because I know how much money I have or don't have. The biggest problem previously was that I did not know how much money I had or what expenses I had coming up. So I just spent and then I could not understand where all the money went. Now with my budget, I am in complete control and am quickly reducing my debt levels. Also, it is often the feelings of not being in control that cause us to be stressed. For me setting and sticking to a budget has been a real stress buster as well.

With a budget you will be able to compare your monthly spending to your monthly income. This will then allow you to work out which expenses you can reduce. For example, you might be surprised as I was on how much you spend on takeout food. What an absolute waste of hard earned money! By reducing your ongoing expenses, you can then start to increase your net monthly profit (ie: the amount of money that is left over at the end of each month) and then you can use excess to start reducing your debt.

One final note: When you are making a note of your various debts, please make sure that you put down everything that you owe even the most minor of debts. Don't just focus on the big ones because at some stage even the small debts will need to be settled. If they are left unpaid they can give you a bad credit rating. The last thing you want is a bad credit rating just because you owe $30 to your mobile phone company for example.

So there you have it - step 1 on how to reduce your debt. Be brave, Work out exactly how much debt you owe and then you can make a plan to reduce your debt and improve your financial position.