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You've probably heard the expression "living beyond your means," which is simply another way of saying that someone is spending more money than they're 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. 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:
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:
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. A non-profit credit counseling service can also be a great option when negotiating repayment plans.
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.