Debt Reduction  





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Debt Reduction  







Debt Reduction

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This article comprises three sections:


- Household Budget Creation;

- Budget Monitoring; and the

- Debt Reduction Program.


All three ingredients are necessary to achieve debt free status in the shortest possible time. This article will not only show you how to be debt free, it’ll also show you how to calculate the time it will take you.


Throughout this article, for illustration purposes, we’re going to use the example of a typical couple of Aussie battlers: Heath and Melissa. Heath is working full time and clears $2000 p/mth after tax. Melissa is now at home with their new-born baby, but earns $250 p/mth looking after her friend Susan’s child at home, whilst her friend is working.



The essential ingredient to reducing your debt and achieving debt free status is to create and monitor a written budget. This is not as difficult and burdensome as it may sound. You can create a paper based one in a folder or using an exercise book, use a spreadsheet on your computer, or use dedicated budgeting software such as the Financial Advisor program we feature on our site.





Creating a household budget allows you to see where your money is going. Without it, you might be asking yourself at the end of the month, "where did all our money go?"


Depending on when you get paid, you would create a household budget that would be either weekly, fortnightly, or monthly in nature.


A household budget simply identifies in writing:

  1. Your total anticipated "Net Income" for the period ($2250 p/mth for Heath & Melissa)

  2. Your total "Anticipated Expenses" for the period ($2050 p/mth for Heath & Melissa)


An example Household Budget can be found by clicking here

You would arrive at your "Anticipated Expenses" figure by listing and adding up all the individual items which comprise your expenses during the period (i.e. food, rent, petrol, loan repayments, credit card repayments, bills, etc..).


This involves including an amount each month for periodical payments. If your car insurance, registration and servicing costs together cost you about $2000 pa, you would allocate about $170 each month toward this. You would do the same for such items as your house insurance and clothing bills.


You then take your total income figure ($2250) and subtract your total expenses figure ($2050). In our example, Heath and Melissa have $200 left over – this is known as their "Disposable Income" and is what they will use to eliminate their debt. We call it "accelerated debt reduction", as $200 p/mth makes a big difference when allocated correctly – we’ll show you how.


By sitting down and doing this, which will probably only take you half an hour or so, you’ll be able to quickly determine how much you can spare each month to eliminate debt. You’ll also know that if you spend any part of your Disposable Income on anything that isn’t in the expenses list in your budget, you’ll be literally "blowing your budget" and hampering your debt reduction plan.





Once you’ve created your budget, the next step is to monitor it. This involves a bit of discipline as you'll need to write down and record every purchase you make and every bill that you pay. Try carrying around a small paper notebook for this purpose when you go out, as trying to remember later what you spent is likely to be difficult.


One day each week, enter in what you spent against each item/category in the "Actual Expenses" column of your budget.


You will then be able to see if your "Actual Expenses" are within your "Anticipated Expenses" figures, and you will be able to adjust your budget or spending patterns accordingly.





This is the fun part because if you can stick to your budget and maintain your target "Disposable Income" figure, you can literally calculate how long it will take you to pay off debt and be debt free. Then it’s just a matter of crossing off the months in countdown mode!! 

  1. Create a Debt List:

First, make a "Debt List" of all your debts. Put them in order so that those with the highest interest rate are at the top of the list. List the minimum monthly payment that you must make against each.

Note: The annual interest rate and minimum monthly payment amount are usually listed on your monthly statements.

Heath and Melissa’s debt list looks like this:







Min. Monthly


Coles-Myer Card




ANZ Visa Card




Car Loan




Home Loan




Total Debt:





  1. Eliminate Debt Target No. 1 – $1780 Coles Myer Card:

Your target will always be to eliminate the debt at the top of your list - the one with the highest interest rate. Therefore, you need only make the minimum payments on the other debts until the one at the top of the list is eliminated.


Heath and Melissa have an extra $200 p/mth to throw against target debt no. 1 in addition to the $38 already budgeted for.

Let’s see how long it will take them:


Coles-Myer Card


Start Balance

22% Interest Added

Accumulated Balance


End Mth Balance

July 2003






Aug. 2003






Sept. 2003






Oct. 2003






Nov. 2003






Dec. 2003






Jan. 2004






Feb. 2004







Presto. In 8 short months they’ll be able to cross item 1 off the debt list – permanently if they cut up the card and never use it again!! (highly recommended).


  1. Eliminate Debt Target No. 2 – $3300 ANZ Visa Card:

Having killed debt target no. 1, Heath and Melissa now have an extra $238 p/mth to throw against the next debt on their list in addition to the $68 already budgeted for it.


Therefore, they’ll be able to pay it off at the rate of $306 p/mth. Without drawing the table, at this rate they would pay off their ANZ Visa card within less than 12mths even though its balance was nearly twice that of their Coles-Myer card.


As you can see, your ability to kill the remaining items on your Debt List improves significantly as each item from the list is scratched as you are able to roll-over those repayment amounts against the new target.


Let’s move on…


  1. Eliminate Debt Target No. 3 – $7000 Car Loan:

With the first two debts paid off, Heath and Melissa have an extra $306 to allocate against the car loan in addition to the $151 already budgeted for. They are therefore able to throw $457 at the car loan.


At this rate, the loan will be paid off in under 17mths (less than 1½ years).


  1. Eliminate Debt Target No. 4 – $110,000 Home Loan:

Now their $110,000 home loan was originally designed to be paid off over 25 yrs. With the budgeted repayments of $744 p/mth, this is how long it would take them.


But now, with all other debts eliminated, they have a spare $457 to throw against the home loan in addition to the $744 already budgeted for. They’ll therefore be able to pay their home loan down at the rate of $1201 per month.


At this rate, their loan will be paid off in just over 10 yrs.


This period could be shortened even further if they were to apply some of the techniques discussed in our Mortgage Reduction Strategies article.






As we have shown, it doesn’t take a high income and lots of sacrifice to achieve debt free status.


Heath and Melissa were facing 25yrs+ of debt. By applying these simple techniques, we have made them debt free in just 13½ yrs, even less if they apply mortgage reduction strategies.


Everybody can achieve this providing they:


Have a small amount of disposable income each week/month

Exercise discipline by writing and monitoring their household budget

Exercise some temporary spending restraint

Exercise a little patience – this is much easier to do when you can calculate and know the time it will take you to achieve debt freedom


If you have a home loan in addition to credit card or personal loan debt, then it may be worthwhile for you to consolidate all your lending into the home loan. This will allow you to clear all your credit card and personal loan debt and will reduce your total monthly repayments due to the lower interest rate on home loans. Doing this is really only of benefit if you do maintain a budget and avoid racking up the balances on the cards again.

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