How to Reduce Your Debt and Save Thousands of Dollars

saveWhen I first started getting serious about improving the way I manage my finances, I started consistently putting hundreds of dollars toward my debt each month. My minimum payment for the car loan I had at the time was $233 and my student loan payment was only $140 per month. Yet and still, I was committed to putting anywhere from $600-900 toward my debt each month.

I remember getting when one of my friends asked me why I was going overboard with paying off debt and sacrificing so much to make extra payments. “You have time to pay that stuff off, so why are you in such a hurry?” I remember her saying.

By putting that much money toward my debt, I was practicing accelerated debt reduction.Why? is such a good question and if you have debt, you’ll be interested to know the answer.

How Accelerated Debt Reduction Can Help You

Accelerated debt reduction is a great way to get your debt under control quickly and effectively save money in the process. You can work with a 3rd party company to consolidate or refinance your debt or you can make progress on your own.

All you need to do is start making extra payments on your debt. You can choose your strategy by starting with the debt that has the highest interest rate or the highest balance or the debt with the lowest interest rate or balance and make at least two payments per month to cut down on interest. Once you’ve paid off one debt, you reassign the money you were putting toward it to another form of debt. Don’t stop accelerating your payments until you are debt free.

If you make extra debt payments each month, you’ll pay less in interest over time so while it seems like you’re spending quite a bit of money upfront to make extra payments, you could be saving thousands of dollars in the long run so it almost always ends up being worth it.

Determining Your Strategy

Before you start throwing extra money on your debt, first you need to take steps on getting out of debt and make sure you lock in a strategy that will be most beneficial to you. Write down all forms of debt you have along with the different balances and interest rates and choose how you will begin to make accelerated payments.

If you are interested in saving as much money as possible, you should choose to pay off the debt that is costing you the most money first. Find out how much each debt is costing you per day. Odds are, the account with the highest balance and/or interest rate is eating up most of your money thanks to interest.

If you are more interested in easing into accelerated debt reduction and you’re worried about how motivated you will be overtime, you may want to start with the smallest balance so you can pay off quickly and move on to the next debt to continually motivate yourself.

In my case, I’ve always been interested in saving the most money and getting rid of interest because it’s pointless to pay interest each month since it’s practically like throwing your money away. My debt consisted of a $10,000 car loan with a 15.5% interest rate and $20,000 in student loans with interest rates that are all under 6.8%. Whenever I made the minimum payment on my car loan, I noticed how $100 of my payment went straight toward interest and not the principal balance.

I decided to make extra payments on my car loan to pay it off once and for all last year. Now I just have student loan debt. I’ve already knocked out two of my 5 loans so far this year and I’m making at least 5 times the minimum payment each month. By doing this, I saved thousands of dollars by paying off my 5-year car loan in 1.5 years and I’ll save thousands of dollars by paying off my student loans early and save myself a lot of stress in the process.

Should You Refinance or Consolidate?

To assist with your accelerated debt reduction strategy, you may want to refinance or consolidate your debt. Both of these debt relief options aren’t interchangeable. Consolidation has to do with simplifying your debt by combining accounts and averaging out a new (hopefully lower) interest rate while refinancing includes getting a new loan with a new lender at a lower interest rate.

It’s best to use consolidation for credit card debt and federal student loans if you have a few and would like to make one payment to the loan instead of trying to make extra payments to several different loans and keep track of it. Federal lenders allow you to consolidate your loans but if you choose to refinance them, you need to go with a private lender and you’ll lose all your federal student loan relief options and resources as a result.

Refinancing is best to use if your interest rates are too high and some people even refinance their mortgages to get a lower rate that will prompt them to save on their payments. With refinancing, you want to make sure it will actually save you money over time before you finalize your decision.

Either of these options may lower your minimum payment by stretching out your term, but if you are paying more than the minimum payment each month this shouldn’t really matter.

How to Find Extra Money to Put Toward Debt

Now the part you’ve all been waiting for. Besides why I’m sure my friend was wondering how I was able to put so much toward my debt each month and still live a comfortable life. Like all good things, it started with a solid budget.

I wrote down all my expenses and listed even the tiniest things like haircuts for my son and any monthly subscriptions I had. Then, I set a goal for how much I wanted to put toward my debt each month and tracked my income to see if it were possible.

I adjusted my expenses and increased my income to make it work which is something everyone can do. If you subtract your expenses from your income and come up with a positive number, that’s good news and means you are spending less than you earn. If you find that you are doing the opposite, you need to cut some expenses asap.

Figure out what you can truly do without either temporarily or long-term and cut it out of your budget. Then, you can either get a second job in your spare time or start a side hustle.

For example, if your goal is to put an extra $600 toward your debt each month but you only have $200 extra each month after all your expenses are paid, you can try to cut $100 from your budget and earn an extra $300 per month to make your goal a reality.

Once you get some momentum going, you’ll see your progress and savings first hand and you won’t want to stop. Think about what your life will be like when you’re debt free and can actually keep the money you are putting toward your debt each month.

Accelerated debt reduction is one of the most effective ways to not only work toward debt freedom but financial freedom as well.

Have you ever tried reducing your debt by making accelerated payments? Why or why not?

Posted in: Credit and Debt

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