How to Reduce Your Debt to 10%
- 1). Create an accurate budget that includes every expense. A budget should contain all expenses: fixed (those expenses that remain the same from month to month---such as mortgage or rent, auto loans, student loans, et cetera) and variable (those expenses that fluctuate---such as groceries, entertainment, utilities, and so on). The budget should likewise contain all net income.
- 2). Determine your debt-to-income ratio. A debt-to-income ratio is the percentage of recurring debt (auto loans, student loans, credit card, and mortgage) that is subtracted from gross monthly income. The formula is to take the sum total of all your recurring monthly debt and divide it by you gross monthly income. For instance, a household with a gross monthly income of $4,000 and recurring debt of $1,600 would have a debt-to-income ratio of 40 percent ($1,600 divided by $4,000 equals 40 percent).
- 3). Begin to reduce your recurring debt by starting with the smallest balance. Taking the budget that includes all monthly expenses, chose the credit card or loan with the smallest balance (including auto loans and mortgage). Pay only minimum payments on all your other credit card accounts and loans and use the remaining money you've budgeted for debt payment toward aggressively paying off the smallest balance. Once that debt is cleared out, take the money you were paying on the first card and move it to the next largest balance. Continue this process until all your debts are paid off. (You will see a "snowball" effect because each account that is amortized will increase the amount you put towards the next highest balance). The goal is to reach a total of 10 percent or less in recurring debt.
