Once you’ve decided it’s time to get rid of debt, one of the first steps you should take is to set up a debt repayment plan.
1. Make a list of all your debts
Before you can devise a strategy, you need to be able to see all your debts in one place. Your list should include the minimum payment, interest rate, and total amount due for each debt. This list should encompass all your debts, ranging from credit cards and personal loans to student loans and even mortgages. If you owe friends or family, you should also include them on your list.
2. Organize your debts
Next, you should organize your debts in the order of priority you want to repay them. Some experts recommend starting with the smallest debt first to build momentum. Others advise ranking the debts from the highest interest rate to the lowest, as this method will save you the most money. Consumer debts, such as credit cards, will typically have a much higher interest rate, so it’s best to start with those. Debt reduction programs can help you organize your debts and create a repayment strategy.
3. Find extra money to pay down your debts
Now, you should decide how much extra money you have each month to pay down your debts. You may need to cut back on spending in other areas to free up the cash needed for your debt repayment plan. Sticking to a strict monthly budget will help you find the extra money to apply to your debts. Another option is to work part-time or increase your overtime hours at your current job to boost your earning potential, or do gig work in the gig economy. You can also sell items to earn extra money for your debt repayment plan. Additionally, you may want to apply any money you receive from gifts and bonuses or tax refunds toward your debts to pay them off faster.
4. Focus on one debt at a time
To succeed in your debt repayment plan, you should focus on paying off the first debt on your list. Put all extra money toward paying off that first debt while maintaining minimum payments on all your other debts.
5. Move on to the next debt on your list
Once you’ve paid off the first debt on your list, it’s time to move on to the next one, continuing to make minimum payments on the other debts. Keep doing this until you’ve eliminated all the debts on your list. When you start working on your plan, it may seem like it’s going to take a long time to pay off your first debt, but over time and with momentum, you may be surprised at how quickly you pay off the next debts.
6. Build your savings
Once you become debt-free, you should focus on building a savings account. This will help you avoid falling back into debt in the future. An emergency fund is one of the best tools you can use to take control of your finances and avoid debt.
Additional tips
Review your bank or credit card policies regarding extra payments and prepayments on your loan. This will help you make the most of your monthly extra payments. Some banks may charge additional fees for extra payments. If you understand how the fees are assessed, you’ll be able to create a strategy that helps you apply the majority of your money toward the principal balance each month.
Was this page helpful?
Thank you for your feedback!
Let us know why!
Sources:
– Fidelity. “How to Pay Off Debt—and Save Too.”
– Consumer Financial Protection Bureau. “What Is a Prepayment Penalty?”
Source: https://www.thebalancemoney.com/how-to-set-up-a-debt-payment-plan-2385869
Leave a Reply