For the first quarter of 2021, household debt in the United States reached a record high of $14.6 trillion. That much debt could stretch to the moon if it were stacked as one-dollar bills. How then can we bring that mountain of debt to its knees? The simplest solution is to reduce spending and pay off debt with extra cash. That is also the trickiest method. The concept of making adjustments that could require us to give up things we perceive to be entirely normal and vital to our life is incomprehensible to many of us as we grow accustomed to living in a certain way.
Having debt is also accepted by many of us as entirely normal, which is something that should never be the case. This is why every attempt to reduce spending will frequently need to be accompanied by a mental adjustment. Spending less is not a sacrifice when it comes to reaching financial objectives, such as debt repayment. Consider it more advantageously as something we must do to regain control over our finances. The following advice can help you cut costs so you can pay off debt.
1. Track Your Spending Habits
Knowing where the money is going is the first step in lowering spending. Keeping track of your spending for 30 or 60 days will undoubtedly open your eyes. Who knew that much money was being used to support your Egg McMuffin and Kindle habits? You could be shocked by how much you've spent on particular things, but this offers you a wonderful opportunity to determine where future modifications are required. Writing down each item as you incur it is the traditional way to keep track of your spending. Many people who want to minimize costs get stopped in their tracks by that onerous task. Fortunately, technology can do our "writing down" for us because we live in the twenty-first century. Check your statements if you use your debit or credit card for everything. One method to make things plain is to print out the statement and use different colored highlighters or pens to identify different categories of spending. Go through everything you spent money on and evaluate what you needed and what were "wants." Or list them with headings for "needs" and "wants" On debit card accounts, some financial institutions even include a pie chart or graph with spending categories that illustrate where your money went. Get receipts if you decide to pay with cash.
2. Establish your Budget
A budget doesn't have to be difficult to make. It is merely a strategy for how your money will be spent. The biggest error people make when budgeting is overcomplicating. Budgeting, according to Barker, can even entail grouping expenditures into "needs," "wants," and "goals" rather than listing each item. This will make it much easier to manage than having a more detailed budget because you'll be able to track and modify your overall expenditure in these categories as necessary. It's crucial to set aside money each month for your financial objectives. Debt repayment should be a top priority. Don't give in to the temptation of taking money from there to use for other aspects of your life. Your top objective should be to reduce your spending so that you can keep moving forward with your debt-free goal. But small goals should also be included – they help measure success, and achieving these milestones can help motivate you.
Keep in mind these 3 things when making your budget
- Determine your income.
- Determine fixed monthly bills – mortgage or rent, utilities, car payment, insurance, etc.
- Determine needs — food, gas, medical expenses, etc.
Your discretionary spending is what's left. Decide how much of that you can put toward paying off credit card debt and how much you can put in savings for an emergency fund. Numerous apps, tools, and other resources are available online, along with numerous budget tools and templates. When you're finished, it could feel like there isn't much money left over for anything.
3. Examine Your Subscriptions
For the internet, cell phones, periodicals, streaming services, cable TV, weight reduction programs, you name it, most individuals pay a monthly fee. Even though the money is taken out of your account each month once you set one up, you probably don't give it much thought. It's time to look closely right now. Think about it:
- How much do I use this?
- Do I need this?
- Can I live without this?
Go through your email and unsubscribe from any newsletters or ongoing adverts that come from that source after canceling the subscription. Don't pass on canceling a subscription because they make it difficult or it appears like a minor expense that won't be worth the hassle. Cutting costs should be viewed as a death by a thousand cuts rather than a single devastating blow.
4. Use less electricity
Your home has to be heated or cooled, and you need electricity for the lights and other appliances. However, there are numerous strategies to reduce your utility costs. The typical home budget includes 12% of its expenses on electricity. Don't leave the computer running, run the dishwasher only when there is a full load, hang your clothes to dry, and lower the temperature are a few immediate ways to reduce those costs. Look around to discover if any utility providers, especially for fuel, have lower rates. Other methods are almost as simple, but require a trip to the hardware store: install a programmable thermostat, and switch to energy-efficient lightbulbs. Many energy suppliers connect to customers' accounts to display cost-saving options.
Other ways to save money cost money up front but result in long-term financial savings. Ensure that you purchase Energy Star products and replace your water heater. Altering your heating and cooling system can reduce your costs and your impact on the environment. Check the website of your state's government before making significant utility modifications because they can be pricey. Many offer assistance to customers who want to migrate to more energy-efficient heating systems. For instance, Maine has a program that provides a $1,000 rebate to homes that move from oil heating to heat pumps, as well as a low-interest loan program to help cover the cost. When thinking about utilities, don't overlook your cable bill and mobile service. Can you decrease the plan or find a more affordable option with another supplier?
5. Reduce your housing costs
Housing is probably one of your greatest expenses; individuals with annual incomes under $50,000 spend an average of 36.6% or more on housing. This is higher than the 30% general guideline that financial professionals advise. Lenders prefer it when borrowers spend roughly 28% of their pre-tax income on housing when evaluating mortgage applications. Although cutting housing costs may seem like the only viable alternative, there are ways to downsize that can be simpler than you think.
Renters have many options to save money on rent. Some are:
- Get a roommate.
- Give up a paid parking space.
- Offer to do repairs yourself for a break in the rent.
- Move to a cheaper apartment, or even a cheaper area of your region, or the country.
Options for those who own home include:
- Refinancing to get a lower interest rate, and lower your monthly mortgage payment.
- Remove private mortgage insurance. If you bought your house with less than a 20% down payment, PMI is required. Once you have 20% equity, it’s removed. Even if you haven’t paid your mortgage down that much, check the home values in your area – if they’ve risen, so has the value of your home. If the value is high enough that you have 20% equity, you may ask your lender to cancel your PMI, and they must comply.
- Sell your home and consider renting one instead. The advantages of renting a house include lower upfront costs, like taxes, insurance, maintenance, and more.
- Rent out your home, or a portion of it, as a short-term rental.
6. Debt consolidation might result in lower interest rates.
Consolidating debt is one strategy to significantly reduce spending. If you have credit cards, your recurring monthly payments may be taking up a sizable percentage of your income. Check the interest rates on the cards; they probably range from 16% to 30%. Multiple debts are consolidated into a single monthly payment. The ultimate goal is to pay off the debt, lower the monthly payment, and pay less interest.
The benefits of debt consolidation are:
- One monthly payment. No more juggling multiple payments, it’s one and done with a good consolidation plan.
- Lower interest rate. What you pay every month is going to reduce what you owe, not the constant build-up of interest.
- Pay off debt faster. It takes about 20 years to pay off credit card debt if you’re just making the minimum payments. Debt consolidation will eliminate your debt in 3-5 years.
The two most common ways to consolidate debt are through a debt consolidation loan or using a debt management plan.
Loan for Debt Consolidation
Obtaining a sizable loan from a bank or credit union to settle the smaller payments is one strategy to consolidate debt. This strategy might work, but you might not be accepted if you have a spotty payment history and poor credit score. If you do, there's a chance the loan may have a high-interest rate, which would be pointless.
Plan for Managing Debt
Someone who needs assistance with credit card debt may benefit from a debt management plan offered by a nonprofit credit counseling organization like InCharge Debt Solutions. For eligibility purposes, these programs do not use credit ratings. Debt is consolidated into a single monthly payment, much like a loan. But unlike a loan, creditors provide nonprofit credit counseling organizations with lower interest rates, which they then pass on to you. You'll have cheaper monthly payments as a result. Counselors can also assist with the difficult task of examining your earnings and outgoings and assisting you in creating a budget and payment schedule that works for you.
7. Reduce the cost of your insurance
Another approach to cut monthly costs is to make changes to your auto and home insurance policies. Look around for businesses that will package them for a lower price if you pay for both. Depending on the type of homeowner or driver you are, you might also be able to get your premiums reduced. Look into firms that provide discounts for safe driving records or for people who drive less expensive vehicles if you want to save money on your auto insurance. Rates might be reduced for vehicles with improved safety features. Membership in a group like AAA has advantages. Check your policy to see if your provider offers discounted rates for making changes to save money on your homeowner's insurance.
Discounts may be available for installing burglar alarms, smoke and carbon monoxide detectors, and both. Also possible is updating heating or electrical systems. Consider increasing your deductible from $500 to $1,000 as well, as doing so can reduce your rate by 25%. Look around for insurance providers who might provide a better rate. For advice on choosing a reputable insurer, visit NAIC.org, the website of the National Association of Insurance Commissioners. To see if you qualify for a discount, see if you've been a customer of your insurance for at least six years.
The biggest unforeseen cost that people frequently overlook is the renewal of items like insurance. Many of us simply pay it and put it off until the next year. You forfeit the opportunity to either discover a better offer from another provider or bargain for a reduction with your existing one by doing this, though. When you next receive a notice of renewal, look into what rival providers have to offer. Once you have this information, you may decide whether you want to switch providers or first try to use it to convince your current provider to match the other company's offer.
8. Eat at Home
It might be very economical to prepare and eat meals at home. It can be made simple by weekly food planning. Determine your weekly menu, make a plan, and then stick to it. Even for those who don't consider themselves to be cooks, the internet has an unlimited supply of recipes and cooking advice. If you don't have time to cook during the week, create something on the weekend that will last for several meals, such as a casserole, chili, or chicken dish. Simply grab and go after portioning it out into daily meal portions. Make a hearty soup, chili, or casserole for longer-term convenience, portion it into one-meal containers and freeze it to provide quick meals for hectic days in the future. When you stop using the drive-through every night, your purchase of six one-portion containers will quickly pay for itself.
9. List What You Will Buy
There are several strategies for reducing your grocery bill, but they all begin with making a shopping list. This easy habit can help with meal planning, lower food costs, and if you keep to the list, less impulse shopping. You may make it as simple or complex as you like, and there are even apps that can assist you in making lists and finding deals.
Some tips are:
- Keep a running list during the week, plan your meals and add items to the list before you go.
- Group the items on the list in categories (produce, deli, dairy, etc.) or even put them in order of where they are in the store. This will keep you from wandering down the candy or chips aisle, where expensive impulse buys lurk.
- Comparison shop between brands and stores, though it’s cheaper to shop one or two stores rather than drive around the area looking for bargains at multiple stores.
Find out whether a local grocery store offers a loyalty program. Many of these programs provide discounts on store-brand products and coupons that are specific to your regular purchases. The days of clipping coupons are long gone; since most loyalty programs have apps, browsing before you go and entering your phone number at the register are the only steps required. Many even include a list function with the ability to add items you frequently purchase.
10. Manage Your Credit Card Usage
Credit card debt is a significant barrier to cost-cutting. Using a credit card when you don't have the cash on hand for anything is simple, but the balances may add up quickly, especially if the interest rate is high. Freezing your credit cards is a smart approach to reduce monthly costs if you have credit card debt. You could freeze your cards; some financial professionals advise doing so by placing them in a water container and freezing them. You need to defrost it before using it. If you want to take more formal action, you can temporarily halt credit cards by visiting the website or app of your issuer and freezing it, which prevents purchases. No further charges will be permitted by the issuer. You must still make monthly payments, interest will continue to accrue, and the recurring payments you've set up will still be executed. You are free to "thaw out" the cards whenever you want and there is no penalty.
11. Use Cash
Your finances will get a serious dose of reality when you start just using cash for purchases. Put as many monthly bills as you can on automatic withdrawal, and then utilize the remaining funds for additional purchases. This necessitates tight adherence to the spending plan but significantly reduces impulsive purchases. Do you want those great shoes? Start setting aside $5 per week for them. if your budget allows it. Some apps can help you manage this, such as mint.com, Envelopes, and others, just like there are many other spending and budgeting systems today.
12. Pay Off Your Outstanding Debts
Your monthly budget will be larger the faster you pay off your debt. As was previously stated, paying off credit card debt must be a top priority. Contrary to your automobile or house payment, it increases with time and is challenging to cut back on. You should plan to pay more than the minimum amount due on your credit card. Do not forget about debt consolidation, especially credit counseling. You can pay off your automobile or mortgage faster by making additional principal payments.