How to Save Money by Reducing Debt

Saving money is not easy. Reducing debt is not easy. But to save money by reducing debt is easy. How? If you combine two activities with opposite goals that both produce positive results to your bottom line, both goals become easier to do in tandem than either one would be alone. Here's how to save money by reducing debt.

To save money by reducing debt, you must pay yourself first. What I mean is that before you pay the IRS, the rent, the car note, buy food, anything, you must save money. If you put that on your budget list just like you put food there, I guarantee you will lose that phenomenon of "I don't know where all my money got spent" syndrome. Psychologically, we always consider other people's debts greater than our own, when it comes to money. If you pay yourself first, the money for the rent and food will show up, because they have to. You'll find a way to do it, which means you will not get that cup of coffee or that extra shirt at the mall. It's the little purchases that add up that bankrupt America. The first step to save money by reducing debt is to pay yourself first, before anyone.

After you make a commitment to paying yourself first, the second step to save money by reducing debt is to allocate the funds appropriately. For instance, if you had $50,000 in a bank account earning 6% and $3,000 on a credit card at an 8% interest rate, it makes sense to pay only the minimum balance. You're earning more by not paying off the card than you would by paying it all off. If you're behind, meaning more debt, you must still look at interest gained and interest rates to get a plan together. My baseline is if you have twice as much debt as bank, then pay off twice as much as you save. 60% debt to bank, then pay off 60% with every paycheck. Save the rest. Remember this is a gradual process, and just as psychological as anything else. You need to see progress to stay motivated. So the second step to save money by reducing debt is to do both at the same time.

As your debt/equity ratio starts to turn around, you will start to feel more free. You must not waste this time or energy. The third step to save money by reducing debt is to get more money. Residual income is the key. You need money that you don't have to trade your time for. So with the new freedom you have as you dig yourself from up under, look for residual income opportunities. eHow is one. That cash flow should be saved and invested.