How to Build a Debt Reduction Plan, Step By Step

By Myles Leva


Last Updated: March 17, 2022


So, you’ve tried to control your debt, but it’s just not working.

You’re far from alone in this struggle. As of the fourth quarter of 2021, the total household debt of the US was $15.58 trillion. That’s a bit more than three-quarters of the size of the entire US economy. Unsurprisingly, a mix of high mortgage balances, auto loans, and student debt is primarily to blame.

Regardless of what specific kinds of debts are causing your struggles, the solutions are similar. The first thing you need is a plan that you are willing to and capable of following through.

Debt reduction strategies enable us to compartmentalize each part of our plans to reduce personal debt. They always require discipline, especially when it comes to budgeting.

In this article, we will try to make sense of debt reduction by:

  • Laying out the key steps of a debt reduction plan
  • Looking into how debt reduction and credit relate to each other
  • Debt reduction vs debt relief

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How do I start a debt reduction?

Debt reduction is a simple concept. You reduce your debt methodically using a mix of budgeting and financial strategizing. Here’s how most debt reduction plans work.

One: Assessment

To formulate a plan, you need to know where you stand financially. To do so, you need to both list out and tally up:

  • Your source(s) of income
  • Your debts
  • Each of your debts’ rates and terms

When casually trying to fight off debt, we tend to settle for some guesswork and make an arbitrary plan for budgeting. But for a real debt reduction program, we must remove the guesswork.

When you truly write down and add up your expenses and your debts, it’s normal to be surprised by what you see. While not knowing what you spend and what you owe is normal, it’s not what you want when you are truly trying to reduce your debt. After all, you can’t hit a target you can’t see.

Organizing your financial information (income streams, expenses, and debts) should be an eye-opening experience. But more importantly, this information is necessary for the next steps of your plan.


Two: Make a Budget to Fight Debt

Your budget is the foundation of your debt reduction plan. Unfortunately, there are no shortcuts. The only long-term way to tackle and then stave off debt is to control how your income relates to your expenses and existing debt.

A good way to get started is to forgo budgeting efforts for about a month while you collect data. For one month, go about your life as you normally do, but actively track all your spending. Split your spending into “wants” and “needs” but also into fixed expenses:

  • Rent/mortgage
  • Fixed loans
  • Utilities

…And variable expenses:

  • Entertainment
  • Eating out
  • Groceries

This can be done with a simple pen and paper chart. However, it’s easier if you take advantage of mobile resources like budget apps. If you have a smartphone, you can use one of many apps to track your spending and debts. These apps can be especially helpful by:

  • Automatically calculating totals
  • Creating pie charts and other visual aids to visualize your spending habits
  • Using the same visual aids to show how much spending goes towards debt repayments
  • Showing you exactly what portion of your income goes into different spending categories

Of course, each app is different and not every budget app has all of the above. But these are all great features to look for when selecting an app

Regardless of how you do it, the goal here is just to have a complete picture of your current finances. Then, you can use that information to come up with a plan that is grounded in your reality.

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Three: Follow Through

This is the part where you develop a plan and stick with it.

Most budgets require some level of austerity to work. That means you will most likely need to cut a few expenses from your life while you fight your debts.

Exactly how you will budget is up to you. There is no universal financial prognosis for fighting debt. However, there are a few things that are always a good idea and which you should certainly consider.

  • No credit cards. Credit card debt comes with especially high rates and by their nature, they add up very fast. You don’t need to cancel or destroy your cards. However, you will certainly need to avoid using them.
  • Use a debt reduction calculator. A debt reduction calculator (or “debt payoff calculator”) is a tool for making a precise plan to pay off debts. However, for you to be able to properly use a debt reduction calculator, you must complete step one first.
  • Consider debt snowball/avalanche. You can’t overlook the significance of the difference in interest rates between each of your debts. It makes sense to factor those differences into your plan.
  • Deliberately pay off debt. In order for your budget to facilitate paying off debt, it must be planned. Factor in how much extra money you can pay towards your debts.


Four: Track Debt Repayment

Set achievable milestones surrounding the removal of your debts.

It helps to set a specific goal to motivate you to carry on with your debt reduction budget. It could be to save for a car or just to save a couple thousand dollars to invest. No matter what the goal is, it gives you something to work towards.

Track your progress. It takes time and effort to complete a debt reduction program. But seeing your situation improve is one of the meaningful parts of the process.


Five: Remember the Experience and Carry it Forward

Ideally, going through a disciplined process for reducing your debt will impart some long-term financial habits to you.

The same processes you go through in a debt reduction program can be applied to other goals. Budgeting is the common theme between reducing debt and saving up for large expenses of all kinds.

More importantly, the completion of a debt reduction program is a good time to start building emergency savings to help avoid similar situations recurring in the future.


How Can I Clear My Debt Without Affecting My Credit Score?

The increases to your credit score from partially paying off debts are normally temporary. However, completely closing a debt is very good for your credit score.

If you’re worried about affecting your credit score, you’re correct to worry. It’s important to remember these facts about credit scores:

  • The average age of your credit accounts is a big part of your credit score
  • Closing a credit card, or especially closing multiple credit cards at once, will have a negative impact
  • You will not harm your credit score by paying off credit cards, so long as they remain active
  • Applying for too much credit in a short period will also harm your credit score


Is There a Difference Between Debt Reduction and Debt Relief?

Debt relief is an industry that includes various measures to reduce or refinance your debts. The intended result is always to make it easier for the borrower to repay their debts. The process often includes aspects such as debt consolidation loans and debt counseling.

Debt reduction, on the other hand, is a simpler concept. It simply refers to any effort meant to reduce the total debt that a borrower has.



Debt reduction is a process of analysis, strategizing, budgeting, and discipline. Starting a debt reduction plan is simple, however, and can be made easier with the help of budgeting apps.

The key to succeeding with a debt reduction plan is proper goalsetting. Don’t be overly ambitious; give yourself a plan that you can follow through. If you can do that, then it’s a simple process of following a budget and paying off debts.

Photo by Smart on Unsplash


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