How to reduce your debt?

This year, one of the first couples I sat down with had a new year’s resolution to get serious about tackling their debt and wanted some help.  Although I do not do this type of work often, I decided to help them anyway.

Take stock of your debt

Before the meeting started, I asked Mike and Jacquie to take stock of their debts by completing a questionnaire I call the debt manager.  Here’s their debt situation:

The Debt Manager  
Name of Debt Amount of Debt ($) Interest rate (%) Minimum Payment ($) Actual Payment ($) how long till this debt is paid off? Comments





15 years monthly payments
Line of Credit





15 yrs, 6 mos monthly payments





2 yrs, 5 mos monthly payments
Bay Card





2 yrs, 11 mos monthly payments






Can they afford the payments?

Currently, they are paying $2235 per month towards these debts.  Their take home pay is about $5000 per month which means 44.7% of their take home pay is going to servicing this debt.  No wonder they feel some financial stress from their debts.

The reasons their debt payments are high is because they are paying considerably more than the minimum required payment.  In their case, putting that much towards the debt may be a good thing because it means they are aggressively paying down the debts.

Strategies to pay down debt faster

Let’s walk through some strategies to get this debt paid down faster.

  • Spend less.  The root of a debt problem always comes from overspending.  It’s so important to fix the overspending problem by spending less.  Mike and Jacquie feel like they have this under control and are pretty reasonable with their spending now so their debt does not get out of hand again.
  • Consolidation of credit card debts.  Jacquie wants to consolidate the two credit card amounts into the line of credit because the interest rates are so much lower on the line of credit. If Mike and Jacquie consolidate the debts into their line of credit, they will have a balance of $50,114.33.  If they continue to make the same payments of $900 per month ($250+$500+$150), this loan would be paid off in 5 years and 3 months and their total interest over that period would be $5413.16.  This is a significant saving in total interest from their current strategy.  If they continue with their current strategy, they would pay over $15,800 in interest on those three loans.
  • Using savings to pay off debts.  Mike has an ING saving account with $4000 in it making about 1.5%.  I suggested that it was mathematically to their advantage to use that $4000 towards the credit card debt costing 18% instead of keeping it in savings at 1.5%.  Since their debt payments are much greater than the minimum required payments, they have lots of cash flow cushion in case of emergencies.  Paying off the Bay card would immediately save them $1180 of interest over the next 3 years and they could also apply the $150 per month towards the Mastercard to pay it off 6 months quicker.
  • Earn more income.  Jacquie is not working full time.  She has stayed at home to raise their two children and has been working part-time for the past 18 months.  Now that both kids are in school full time, she feels she could work a little more to pay of the debts a little faster.  If she can put an extra $250 per month towards debt payments (assuming the consolidation strategy above), that would knock off the debt 1 year and 3 months sooner.

What you have here is a look at a real-life case to help you understand the process of assessing your debt situation and developing strategies to tackle the debt problem.  What do you think?  Do you have any other suggestions for Mike and Jacqueline?

Debt calculators and tools

To help Mike and Jacquie with these calculations, I used three tools:

The Debt Manager Spreadsheet – This is a simple spreadsheet I put together to help them take stock of their debt and calculate some simple ratios.  Feel free to download the spreadsheet use with your own numbers.

Online debt payment calculator – find out how long it will take to pay off debt and how much interest you will pay to do so.

What will it take to pay off my debt – if you have a goal to pay off your credit cards before a specific period of time, you can find out the monthly payment required to pay it off?


  1. Doug

    Great article and ideas. I would call Mastercard and tell them to give you a lower rate. Usually if you had made minimum payments and have good credit, they should be able to knock off about 6-8 percent in interest. If you couldn’t consolidate the credit cards into the line of credit, and have asked for the lower interest rate on the MC, then the Bay card would be my first target. Ride out the minimum payments on the mortgage, LOC, and MC. By paying only the minimum payment on these three items, you are saving 920 including the 150 payment on the Bay card. Now hit the Bay card with this payment of $920 and the Bay card is paid off in under 6 months. Apply the same principal then to the MC, then the LOC. You are left with 2235/month to hit the mortgage. Your debts will be paid off quicker in no time, saving thousands in interest.

  2. My Own Advisor

    Without knowing more details, probably unfair of me to comment about what they should do but I would propose the following knowing what I see above:

    -Make min. payment on house. Tackle high-interest debt first.
    -Consolidate credit card debts. In fact, use LOC to pay off credit cards and then throw credit cards away/put them away until LOC is paid off.
    -Take all savings and tackle the LOC. After savings are depleted, use automatic transfers to pay down LOC at regular intervals, more than the min. payment.
    -Cut out any unnecessary spending, reduce cable, phone bills, etc. and tackle LOC with additional payments.

    Mike and Jacquie will do just fine, the first part is the hardest, starting! 🙂

  3. Calgary Realtors

    Didn’t make this a New Year’s resolution, but it’s on my list of goals for 2012. Not to be completely void of debt, but to have a better handle on it, and more importantly, a better understanding of where we’re going.

Leave a reply

Your email address will not be published. Required fields are marked*