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    5 ways to reduce your holiday debt

    10:38 PM, Jan 29, 2014   |    comments
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    Photo Gallery: 5 steps to reduce your debt
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    LITTLE ROCK, Ark. (KTHV) - It's the new year and for many Arkansans there are bills to pay.

    "Often January is the time when you're facing the holiday shopping binge hangover, I guess," said UALR Chief Economist Dr. Michael Pakko. "So for a lot of households January is a time to reconsolidate, to think about paying off those bills that you racked up over the holiday season and getting things back on track."

    "People have a tendency to overspend," said Eric Hutchinson, a certified financial planner and President of Hutchinson Financial based in Little Rock. "It's very easy to live on more than you earn with credit, it's an extra discipline to live on less than you earn... This is not difficult, it's not rocket science, the challenge is the mindset, what's in your heart. If you really want to have debt not be an issue in your life it takes commitment, it takes consistency to pay down those cards, pay off those loans and then not create new [debt]."

    Hutchinson said the first step in the process is recognizing there's a problem and putting a stop to the spending. Then, step 2: putting together a list of every debt you have. List the amount you owe, the minimum monthly payment, and the interest rate on each account.

    "If they list everything that they owe," said Hutchinson, "list the balances and list the interest rates from there they can develop a plan to get this debt under control or even completely out of their life."

    Step 3: figure out how much money you can devote to paying down your debt each month.

    "How much do they have available to meet these obligations?" added Hutchinson. "You absolutely need to meet the minimum payment on all those obligations, you have to do that, but how much extra do they have to start paying something down?"

    Step 4: focus on paying off the debt that has the highest interest rate first, then focus on the debt with the lowest outstanding balance.

    "Once that particular card is paid off look for the next item that is the lowest balance and by focusing, then, on the lowest balance as the second item you get that psychological boost of 'now I've got two of them paid for!'" added Hutchinson. "Keep rotating back and forth: highest interest, lowest balance until every single one of them is paid and there's a snowball effect because as you get one paid off, the minimum payment that you were making on that one, that becomes extra cash that you can put on the next one and so this whole process will happen a lot faster than they might realize if they allow the snowball effect to take place."

    The 5th step in the process, according to Hutchinson, is taking time to celebrate your success once you finally do pay your way out of debt.

    "If they discipline themselves enough to make a budget and make the list and figure out and snowball and take the highest interest and the lowest balance, those kinds of things, keep doing that and get out of debt, take time to celebrate that," said Hutchinson. "Take time to really savor and enjoy the accomplishment of that, it is a big deal and not everybody is willing to do that so it's a significant accomplishment and they should be celebrating that success."

    "Managing your personal finances is just a question of understanding where you stand and making plans to look for a better situation in the future," added Pakko. "The most fundamental way to get out of a debt situation is to not spend as much as your income. You have to be paying down those debts over time, and that requires putting the together information you need to know exactly where you stand."

    "Debt is not a four-letter word, it's not a bad thing unless it's used improperly," added Hutchinson. "Live within your means, if you can pay cash for it pay cash for it. Once people get in the habit of living on less than they earn they, pretty much, are not going to have money problems for the balance of their lifetime."

    Hutchinson also offered another tip for helping find a little extra breathing room in your budget: shop around and take advantage of current interest rates. According to Hutchinson they are lower than they have been in decades and the Federal Reserve is already taking steps to bring those interest rates back up.

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