Do it Yourself Debt Reduction

In this topic, we cover:

  • The three steps in creating a personal debt reduction plan.
  • Ideas for increasing income.
  • When to seek the help of a professional.


3D dollar signs filling the image.

You have probably heard the expression "living beyond your means," which is simply another way of saying that someone is spending more money than they are earning. The key to getting out of debt is to either increase income or reduce expenses so that you are earning more than you spend. You then use the remaining money to pay off your debt.

Step 1: Estimate Income

The first step to reducing debt is to understand exactly how much money you are making. Our monthly budget calculator provides an easy way to do this if you receive a regular paycheck. If you don't receive a regular salary, you will need to estimate your likely income and revise this amount as needed.

After totaling your income, you may want to consider some of the following options:

  • Get a part-time job or increase your hours at a job you may already have.
  • Make sure you have the right amount of tax withheld from your paycheck (a sign of having too much withheld is regularly getting a large refund on Federal or State taxes). Adjusting the number of exemptions on your W-4 form may increase your take home pay, but sure to check with a professional first - otherwise, you may accidentally end up owing money at tax time.
  • Liquidate assets. CDs, clothes, collections, or anything else you have of value could be sold to pay off debt.
  • Seek help from your family. If available, a low-interest family loan is much better than credit card debt.

The options listed above are obviously not for everyone, and we urge you to discuss your situation with a financial counselor before making any major decisions.

Step 2: Reduce Expenses

Increasing income can be difficult for many people, especially if you already have a full-time job. The good news is that just about everyone can, with some discipline, reduce their expenses. Here are some ways:

  • Reduce discretionary spending. Things like meals out, brand-name coffee, and new clothes can be some of the easiest expenses to cut.
  • Consolidate or eliminate services. Do you have both a cell phone and landline? Eliminate the landline and save hundreds per year. You may also be able to reduce optional phone services (caller ID, data plans, etc.) that could save hundreds per year. Eliminate cable television.
  • Cancel recurring charges. Unused health club memberships and newspaper or magazine subscriptions may be a source of savings.
  • Reduce energy consumption. Lowering your thermostat in winter, turning off air conditioning in summer, turning off lights when leaving a room, and walking rather than driving may also be sources for savings.
  • Make gifts for family and friends rather than purchasing them.
  • Consider lower cost housing or taking on a roommate.
  • Explore local assistance options. Food pantries, food stamps, and thrift stores can be effective ways of saving hundreds of dollars per month.
  • Contact your creditors. Explaining your financial situation to lenders can be a great way to get interest rate reductions and to develop a payment plan that will work, but make sure that any arrangements will not negatively affect your credit report. You want your account to stay open and described as "paid as agreed."

There are hundreds of ways to potentially save money, many of which will not apply to your current situation. Use the monthly budget calculator to see where and what you currently spend and where you could save.

Step 3: Review Cash Flow

After taking all the steps in your power to raise your income and reduce your expenses, how much is left at the end of the month? If your income exceeds your expenses (including debt payments), you have positive cash flow. Make at least the minimum payments on all accounts, and take any extra money and apply it towards your debt until that debt is eliminated.

If your income is not enough to pay your expenses, you have negative cash flow. Review your earning and spending estimates again to see if any opportunities were missed. If you still have negative cash flow, it's time to seek additional help from a credit counseling agency.