Strategic Debt Reduction

Debt will be a major roadblock on your journey to financial prosperity if you do not control it and keep it to a minimum. Substantial debt will deteriorate your net worth if you neglect to tackle it head-on. It can be very difficult to know where to start when you see debt consolidation agencies and credit repair companies around every corner. The problem here is that their services are not offered for free. So there you are working towards reducing your debt while simultaneously paying a monthly fee to the debt repair specialists. Do you see how this can work against you? The good news is that I am here to tell you that there is a better way to obtaining control over your debt that will not cost you anything but time and commitment!

Through my years of study and practical application, I have developed a strategic debt reduction plan that has worked quite well for me. This plan will work for you just as well if you fully commit to it and follow through to completion. I have constructed a strategic debt reduction plan into four easy steps so let's jump into it!

Step 1: Balance Sheet & Credit Report analysis

The very first step to debt reduction is balance sheet analysis. Your personal balance sheet will display your monthly income, monthly expenses (by line item), the total value of your assets, the total amount of your liabilities, and lastly, the balance sheet will calculate your net worth. Your balance sheet will give you a crystal clear picture of your current financial health and will provide the framework for implementing the debt reduction strategy. Any type of debt reduction plan should not be pursued without first analyzing your balance sheet.

Within the balance sheet focus on the "cash flow" number. This number will represent your after-tax monthly income minus all monthly expenses. If this number is too small its time to dig into the budget to identify opportunities for reducing your expenses. For example, do you really need that cable TV subscription when there are alternative options such as Sling TV? Do you really need that fancy gym membership when you can do simple yet effective exercises right there in your living room? These amounts may seem small but they add up substantially over time. The more you can pay towards your debt, no matter how small the amount may be, will speed up the process for debt reduction.

Part two of this step is to review your current credit report. You can get a free copy of your credit report by clicking here. Thoroughly review each item on your credit report and submit a dispute for any debts that you do not recognize.

Step 2: Develop the Debt Reduction Plan

Now that we have compiled and reviewed your balance sheet and credit report, it is time to construct the action plan. Simply put, list out all of your debts in accordance with the interest rates from largest to smallest. Increase the monthly payment as much as possible without breaking the bank on the debt with the highest interest rate, and set the other debts to the minimum monthly payment amount. Rinse and repeat once you have cleared the highest interest rate debt.

The highest interest rate represents your most expensive debt. Therefore, it is best to reduce your debt in accordance with the highest interest rate so that you can reduce the amount of interest you owe as quickly as possible.

Step 3: Negotiations

Now that you have begun your repayment plan, the next action is to contact each lender/creditor to open up negotiations for improving the terms of your debt. Many creditors will be happy to work with you if it means settling the debt sooner than later.

Begin the negotiation by focusing on reducing the settlement amount. Ensure that you low-ball your initial settlement amount offer with the objective of meeting somewhere in the middle with the creditor. After you have successfully renegotiated the settlement amount, repeat this process with the interest rate.

*Very important! Always remember that renegotiated repayment terms are nonexistent until you see it in writing!

Step 4: Follow Through to Completion

In other words, stay the course! This is the last and most important step. Any plan without execution and follow through to the end goal is worthless. You must commit yourself to check on your progress each month to ensure that you do not fall off track.

A lot of people can talk a good game and begin working towards financial prosperity, but only a few follow through with the plan with deliberate action, consistently.

Which category identifies you? What will your legacy be when your time on this earth has run out?

You decide...

Take charge of your money! 

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Hudson Wealth Management 

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Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee-schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.