Basic Step #5
Review and Reduce Your Debt

a wallet surrounded by cash, coins and credit cards

Many financial advisors suggest that your total consumer debt should be less than 20 percent of your net income. Consumer debt includes credit card payments, car loans, student loans and any other debts that you repay monthly, and does not include money spent on a mortgage, rent, utilities or taxes. Use these calculations to assess your debt load.

My yearly net income after taxes and deductions is $__________.

My monthly net income is $__________ (yearly income divided by 12).

According to the 20 percent guideline, the amount of consumer debt per month that I should not exceed is $__________ (monthly income x 0.20).

Create a Plan to Reduce Debt

Don't let your debt overwhelm and paralyze you. Combine financial planning with debt management techniques to reduce your debt by implementing the following tactics:

  • Create a get-out-of-debt plan. Use this calculator to get an overview of how long it might take you to pay off your debt.
  • Cut expenses. Try to identify a few things you could stop buying or buy less often.
  • Get a second job. Try to increase income. Is it possible to get a second job or overtime?
  • Prioritize debts. Pay off the highest interest rate debts first and move funds to the next when paid off.
  • Shift higher-interest loans to a single lower-interest loan.
  • Stop running up new charges.
  • Keep only one or two major credit cards and consider having the limits lowered.
  • Stop credit card offers from arriving in your mail: Call 1-888-5OPT-OUT (1-888-567-8688,
  • Set your goal. Each month, I can afford to pay around $__________ for my consumer debt.

Take SAM’s free Credit and Debt Basics course to create your own credit and debt plan.