Let’s face it, managing debt can feel overwhelming- like a dark cloud hanging over your financial future. But here’s the good news: you’re not alone, and reducing debt is more achievable than it seems. Many people are in the same boat, trying to figure out the best steps to manage and actively reduce their household debt. The key to success lies in breaking down this seemingly challenging task into smaller, more manageable steps. In this blog, we’ll explore six simple and effective strategies you can use to reduce and manage debt.

6 Simple steps to reduce and manage household debt

Understand your debt in detail

The first and most important step is getting a clear understanding of your debt. This doesn’t mean simply knowing you owe money, but fully grasping the details of every debt you have. Start by making a list of all your debts—credit cards, personal loans, car loans, or any other liabilities. For each debt, record the following:

• Total amount owed
• Interest rate
• Minimum monthly payment
• Due date: This exercise provides a comprehensive overview of your financial situation. You might find that seeing all your debts together on paper or in a spreadsheet feels intimidating, but this step is critical for tackling debt head-on. With this clarity, you’ll be in a better position to plan your next steps.

For example, imagine you have five debts totalling £15,000. Some carry high interest rates while others, like a car loan, might have lower rates. Knowing these details allows you to prioritize which debts to pay off first.

Build a budget that focuses on debt repayment

After understanding your debts, the next step is creating a budget. A budget is a tool that shows where your money is going each month and helps ensure that you’re allocating funds where they’re needed most. If you don’t have a budget, now is the perfect time to create one that prioritizes debt repayment.

Here’s how to start:

• Income: Write down your total monthly income from all sources.
• Essential expenses: These are fixed expenses like rent or mortgage, utilities, groceries, and transportation.
• Debt payments: Include the minimum payments for all your debts.
• Discretionary spending: This includes non-essential expenses like dining out, subscriptions, or entertainment.Once you have a clear picture of your finances, the goal is to identify areas where you can reduce discretionary spending. Every pound saved can be redirected toward paying down your debt.

For example, cutting out a few dinners at restaurants or cancelling unnecessary subscriptions could free up an additional £50-£100 each month. While these seem like small amounts, over time, they can make a significant impact on reducing your debt.

Choose the best debt repayment strategy for you

When it comes to paying off debt, it’s essential to have a clear strategy. Two widely used approaches are the Debt snowball and the Debt avalanche methods:

• Debt snowball: This method focuses on paying off your smallest debt first. Once that debt is cleared, you move to the next smallest. The main advantage of this approach is the psychological boost of seeing your debts disappear quickly. It provides motivation and momentum as each debt is eliminated.
• Debt avalanche: This method targets the debt with the highest interest rate first. By focusing on high-interest debt, you save more money in the long run because you reduce the amount you’re paying in interest. While it might take longer to see progress, this approach is more cost-effective.

For example, if you have a credit card debt with a 20% interest rate and a car loan with a 5% interest rate, the avalanche method would have you pay off the credit card debt first because it’s costing you more in interest.

Choosing between these strategies depends on your financial goals and personal motivation. If you need quick wins to stay motivated, the Debt Snowball is a great option. If saving money on interest is more important to you, the Debt Avalanche might be the better choice.

Pay more than the minimum when possible

Minimum payments are designed to keep you in debt for a long time. If you only pay the minimum each month, a significant portion of your payment will go toward interest, rather than reducing the principal balance. This prolongs your debt repayment and increases the total amount you’ll pay over time.

Whenever possible, try to pay more than the minimum. Even small additional payments can make a big difference in the long run. For instance, if your minimum payment on a credit card is £30, consider paying £50 or more. This reduces your balance faster and saves you money on interest.

Let’s say you have a credit card debt of £2,000 with an interest rate of 18%. If you only pay the minimum, it could take years to pay off that debt, and you could end up paying hundreds of pounds in interest. However, if you pay even a small amount extra each month, you can drastically shorten the repayment period and reduce the overall cost.

Negotiate lower interest rates

Did you know you can often negotiate with lenders to lower your interest rates? If you’ve been consistently making payments on time and have a good credit history, many creditors may be open to lowering your interest rates. Lower rates mean more of your payments go toward reducing the principal balance rather than interest.

Start by calling your credit card companies or loan providers and asking if they can offer a lower rate. This simple phone call can potentially save you hundreds of pounds over time. If they agree, you’ll immediately start paying less in interest, allowing you to focus on paying down the actual debt.

Another option is debt consolidation. By consolidating multiple high-interest debts into a single loan with a lower interest rate, you simplify your payments and reduce overall interest costs. Just be sure to research your options carefully to avoid any hidden fees.

Seek professional help when needed

If you’re struggling to manage your debt on your own, don’t hesitate to seek professional help. Many nonprofit credit counselling agencies offer free or low-cost services to help individuals create a debt management plan. These agencies can also negotiate with creditors on your behalf, helping you get better terms or reduce your interest rates.

Credit counsellors can provide valuable guidance, helping you restructure your finances and make a plan for the future. They’ll work with you to create a repayment schedule that fits your income and ensures you’re making steady progress toward becoming debt-free.

Additionally, if your situation is more complex, a financial advisor can provide a long-term strategy, not just for managing debt, but for building a secure financial future as well.

Conclusion

Managing household debt doesn’t have to be an impossible task. By following these six simple steps—understanding your debt, building a budget, choosing the right repayment strategy, paying more than the minimum, negotiating better interest rates, and seeking professional help—you can take control of your finances and work toward a debt-free future.

At Know Your Dosh, we believe that managing your financial life should be straightforward. Our platform allows you to organize and store all your financial information in one place, making it easier to track your debt, payments, and progress. Plus, it helps you ensure that your loved ones have access to important financial information when they need it most.

Take action today—start by applying these strategies and trust Know Your Dosh to support you on your journey to financial freedom. With a solid plan and the right tools, you can reduce your debt and gain peace of mind about your financial future. Sign up for Know Your Dosh here.