You’ve made the decision that it’s finally time to tackle your debt once and for all. This is the first and most important step to enjoy financial freedom and security. But where do you begin in paying down debt?
The first step is to create a debt repayment plan. With a solid plan, you can have clearly defined goals to work towards, which makes it much easier to keep your eye on the prize. A repayment plan also helps you to get out of debt quicker because you can see the progress you’ve made.
Keep reading to get the step-by-step to create an effective debt repayment plan.
List Your Debts
The first step in creating a debt repayment plan is to have a full picture of the debt you owe. Make a list of all of your debts to include:
- Total debt owed
- Interest rate
- Minimum payment
- Payment due date
- Creditor name
It’s also important to notate which kind of debt you have, to include a mortgage, car payments, student loans, credit cards, and even personal loans. Debt also includes any money you’ve borrowed from friends or family members.
To ensure that your list is complete, you can order and review a free copy of your credit report. This way you can have 100% assurance that your list is correct and comprehensive.
Prioritize Your Debt
Once you’ve notated all of your debt, the next step is to prioritize your debts. There are two effective ways to rank your debt. The first way is to prioritize debt based on the total debt amount. By paying off the smallest amount of debt first, you can get your momentum going and actually see the progress you’re making.
On the other hand, you may want to prioritize debt based on the interest rate. By paying off the highest interest rate debt first, you’re able to save money now and in the long run.
Once you’ve prioritized your debt, it helps to visualize your goals. You can use debt payoff planner apps or templates to get a visual representation of your debt payments and to get a timeline of when debt will be paid off.
How you rank your debt is your own personal decision. There’s no wrong or right way to pay down your debt. What’s important is that you prioritize debt in a way that makes sense for you and is a plan that you will stick to.
Spend Less & Make More
Now that you’ve got a plan of attack, you’ll need to figure out how much money you can afford to put towards your debt each month. In order to give yourself more financial wiggle room, it’s important to spend less money while also finding ways to increase your monthly income.
There are is an endless amount of ways you can spend less in your day-to-day life. If you live in the city, use public transportation. This saves you money on gas and auto insurance costs. Do you often buy your lunch or dinner? While eating out is nice, it’s also very expensive. Grocery shop and make your meals at home, saving you hundreds of dollars each month.
Other ways to save money include:
- Using coupons and discounts
- Bundling services
- Lower your cell phone and insurance payments
- Avoid impulse purchases
By saving money, you’ll have more funds available to put towards paying off your debt. Another important piece of the equation is to find ways to make more money. Something as simple as holding a yard sale or selling unwanted household items online is an effective way to increase your monthly income.
You could also work a secondary part-time or seasonal job or even a side hustle. Even if you’re just making an extra few hundred dollars a month, that money will allow you to pay off your debt much quicker.
Stick To Your Plan
Being in debt is frustrating and you may find it all too easy to veer off course. Stick with your debt repayment plan so that you can most effectively pay down your debts. Focus on repaying the debt that has been prioritized at the top of the list. All of your extra money should go towards this debt first. For other debt, pay the minimum balance.
By focusing on one debt at a time, you’re able to more quickly pay it off, as more money goes towards the principal balance. Spreading extra money over many debt payments has a lesser impact because more of your money goes towards interest.
Paying off debt isn’t easy, especially when you’ve got thousands upon thousands to repay. But, by creating a debt repayment plan, you can set goals and have a solid plan of attack to get your debt under control.
Image Credits: Debt Repayment Plan from Ae Cherayut/Shutterstock