The main thrust of any debt reduction plan should be how much extra you can put toward paying down your loans each month. Trying to figure out how much should go toward debt reduction can be challenging, however.
As you try to figure out how much money should go toward debt reduction, here are a few things to keep in mind:
You Waste 10% to 15% of Your Income Each Month
Experts suggest that many American households waste between 10% and 15% of their income each month. That means that if you make $3,500 per month, there’s a good chance that you’re wasting between $350 and $525. Those money leaks could be plugged and that amount applied toward your debt reduction.
In order to identify your money leaks, track your spending for at least a month. Figure out where your money is going. Once you make paying down your debt a priority for your budget, you can see which items are holding you back. Cut those expenses and put that money toward paying off your high-interest debt and you’ll be surprised at how much you can accomplish in a relatively short period of time.
Using the 10% to 15% number is a good place to start when figuring out what to aim for. While your situation might require a different approach, determining what you’re likely wasting each month can give you a ballpark amount for how much you can put toward debt reduction.
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What Do You Need to Survive?
Another method of determining what to commit toward paying off debt is toting up what you need to survive — and then putting almost everything else toward debt reduction. This is an extreme approach that might not work for everyone. But if you can keep it up until you pay off your debt, you can make a lot of progress in a very short period of time.
If you make $3,500 per month, add up what you spend on your housing, food, transportation and other required bills. Perhaps you need $2,800 to survive. That leaves you with $700 each month for debt reduction. If you can find other ways to pinch pennies and shave more off the grocery bill, or use other strategies to reduce your bills, you can probably find even more to get rid of debt.
Can You Stick With It?
Extreme debt reduction works well for some households, but it’s not always ideal for everyone. If you have a family with teenagers and one of your priorities is making sure they have access to activities and opportunities, it might not be practical to cut all of your expenses to the bone. Additionally, if your life partner isn’t on board with extreme saving in order to aggressively tackle debt, you might not want to push it.
Being able to be realistic about what you can accomplish for your debt pay down. In some cases, extreme frugality leads to such dissatisfaction that after a few months it becomes impossible to continue — and the plan falls apart. It’s better to keep making steady progress for an extra year or two than it is to completely give up and fall back into old habits after eight months.
Do You Have Extra Income?
One of the best ways to find extra money to put toward debt reduction is to look for ways to earn extra income. If you want to put $650 toward debt reduction each month, but can only find $450 to cut from your budget, it might be possible to make up the other $200 with the help of extra income. You can also use additional revenue to boost your monthly debt payments, even if you aren’t seeing a shortfall. Whether it’s a part-time job, side gig or some other resource, you can use that income to determine how much extra you can put toward debt reduction each month.
What’s your favorite way of finding money for debt reduction?