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| 7 Simple Steps to Create a Debt Repayment Plan |
Getting out of debt is a smart decision that requires a clear plan of action. A debt repayment plan will help you stay focused, motivated, and efficient as you pay off your debt. You will also see the benefits of allocating your extra money to one debt at a time, which will accelerate the debt repayment process. You will be amazed at how fast you can eliminate each debt if you follow a debt repayment plan.
In this article, we will discuss 7 habits that can help you pay off your debt. We'll also provide tips and advice for developing and maintaining these habits. Let's get started.
To create a debt repayment plan, follow these seven simple steps.
1. List All Your Debts
The first step is to have a complete overview of your debt situation. You need to list all your debts, including the minimum payment amount, the interest rate, and the total balance. This list should cover all types of debt, such as credit cards, personal loans, student loans, and even your mortgage. You should also include any money you owe to your relatives or friends.
It is advisable to have a small emergency fund of about one month's salary to avoid using your credit cards again while you are paying off your debt. You should save this amount before you start applying extra money toward your debt.
2. Prioritize Your Debts
The next step is to determine the order in which you want to pay off your debts. There are different approaches you can take, depending on your preference. Some experts suggest starting from the lowest to the highest amount, as this gives you a sense of accomplishment. Others advise going from the highest to the lowest interest rate, as this will save you the most money.
Consumer debt, such as credit cards, usually has a much higher interest rate, so it's a good idea to tackle it first.1 You can use debt reduction software to help you prioritize your debt and devise a plan to pay it off.
Ultimately, the choice is yours; the key thing is to follow the order you set.
3. Increase Your Income To Pay Your Debts
Now, you need to figure out how much extra money you can spare each month to pay toward your debt. You may need to reduce your spending in other areas to free up money for your debt payment plan. Following a strict monthly budget will help you find extra money to put toward your debt.
Another option is to take on a side hustle or work extra hours at your current job to increase your income, or find additional work in the gig economy. You can also sell things to earn extra money for your debt payment plan. Moreover, you may want to use all the money you get from gifts, bonuses, or tax refunds to pay off your debt faster.
To increase your income, you need to find additional sources of income that you can do alongside your main job. Some ideas you can try are:
- Selling used items. You can sell items that you no longer use, such as clothes, books, or electronics, on online trading sites, social media, or flea markets. You can earn money from items that are just piling up in your house.
- Become a freelancer. You can offer your services or skills, such as writing, designing, teaching, or others, on freelancer sites, social media, or online forums. You can earn money from your hobbies or interests.
- Investing. You can use the money you have to invest in instruments that suit your risk profile and financial goals, such as stocks, bonds, mutual funds, or others. You can earn money from interest, dividends, or capital gains.
Increasing your income can help you pay off your debt by:
- Increasing your financial capacity. You can have more money to pay your debts and achieve your financial goals. You can also have more money to save or invest.
- Increasing financial independence. You can be less dependent on your main source of income. You can also better cope with situations such as job loss or a decrease in income.
- Improves financial well-being. You can improve your quality of life and happiness by having more money to fulfill your needs and wants. You can also boost your confidence and self-esteem by having more money.
4. Concentrate on One Debt at a Time
To succeed with your debt repayment plan, you should concentrate on paying off the first debt on your list. Allocate all extra money to this first debt, while paying the minimum on all other payments.
When you concentrate on one debt at a time, you can pay off the debt more quickly, because more of the money will go directly to the principal balance and less is spent on paying interest. When you distribute your extra money over several debts, you are reducing the effect it has on your debt because you are paying more interest.
5. Proceed to the Next Debt on Your List
After you have eliminated the first debt on your list, it's time to proceed to the next one, while keeping up with the minimum payments on the rest of your debts. Keep doing this until you have paid off all your debts. At the beginning of your plan, it may seem like it will take a long time to pay off your first debt, but as you progress through your list and gain speed, you'll be amazed at how fast you can pay off the next one.
6. Save Up Your Money
After you've cleared all your debt, then you should concentrate on saving up money. This will help you avoid getting into debt again in the future. A rainy day fund is one of the best tools that you can use to manage your finances and steer clear of debt.
And when it comes to using credit cards in the future, use them wisely or not at all. Your future self will appreciate it.
7. Create and Follow a Budget
A budget is an important tool for managing your finances. With a budget, you can see how much money you make and how much money you spend. You can also prioritize and allocate your money for needs, wants, and debt.
To create a budget, you need to record all your sources of income and expenses. You can use apps, software, or paper and pen. You should divide your expenses into categories, such as food, transportation, entertainment, and others. You should also separate fixed expenses, such as rent or mortgage, and variable expenses, such as electricity or gasoline.
After that, you have to subtract your total expenses from your total income. If the result is positive, you have a surplus. You can use the money to pay more debts or save. If the result is negative, you have a deficit. You should review your expenses and look for ways to save or eliminate unnecessary ones.
To follow a budget, you have to monitor and evaluate your expenses regularly. You can use apps that can connect your bank and credit card accounts and track your transactions automatically. You can also use the envelope method, which divides your cash into several envelopes according to spending categories. If the money in one envelope runs out, you can't take from another envelope.
Creating and following a budget can help you pay off your debt by:
- Increasing financial awareness. You can see your financial situation more clearly and accurately. You can see how much money you have, how much you need, and how much you want.
- Improve financial control. You can manage your money better and more efficiently. You can avoid waste, reduce debt, and increase savings.
- Increase financial achievement. You can plan and achieve your financial goals more easily and quickly. You can prioritize, allocate resources, and measure your progress.
Other Tips
Check your bank's or credit card's policies about extra payments and principal payments on a loan. This will help you make the most of your extra payments each month. Some banks will charge you an extra payment fee.2 If you know how they charge, you will be able to devise a strategy that will help you apply the bulk of the money to your principal each month.