Debts can be frustrating, both financially and emotionally. There's always this unsatisfactory feeling you get when you know you're owing, and the money you expect might just go to your debtors. So, you need to figure out how to pay off your debts and live a debt-free life to enjoy financial success.
Of course, you might not be able to pay off your debts all at once. But with a good repayment plan, you can start small and gradually clear all the debt sooner than you think. A good repayment plan can help you pay down high balances, save money, and reach your financial goals. Here, you'll learn how to set up an effective debt elimination plan in 5 simple steps.
#1. Create a List of Your Debts
This is the first stage where you will make a list of all your debts. If you owe money to family and friends, also ensure you include it on your list. While making a list of your debts, also ensure you add the name of the lender, interest rate, the total amount owed, and the minimum monthly payment. You can also include the contact info of each lender and any other relevant details.
#2. Analyze Your Spending
The next step in your debt elimination plan is analyzing and understanding your spending. It's time to study your spending habits to see how you spend each month compared to what you think you are spending. Group your spending into different categories: rent, utilities, insurance, feeding, transportation, etc.
In the process, you might find some categories where you spend more than you thought. For instance, you might find out that you can save more money when cooking at home instead of eating out.
#3. Create a Budget
A basic budget helps you structure your expenses to match your income level. A good budgeting method to consider while creating your budget is the 50/30/20 method.
The 50/30/20 method helps you prioritize your needs over your wants while still creating space for savings. The idea is to allocate 50% of your income to needs, 30% to wants, and 20% to savings. Other budgeting methods include the envelope system and the zero-based budget.
#4. Implement an Effective Debt Repayment Strategy
Once you have your budget, the next thing to do is decide how to pay down your debts. In this process, you can apply any of the two popular strategies for paying debts: the avalanche and the snowball method.
With the avalanche method, your focus is first on paying the debt with the highest interest rate. You put the extra money you have at the end of each month to them while making minimum payments on your other debts.
Unlike the avalanche method, the snowball method focuses on the least balance. Any extra money from your budget is set towards your smallest debt balance while you make minimum payments on your other debts.
#5. Track Your Debt Elimination Progress
Tracking your debt payment will enable you to see how far you have come and how much you have paid. The aim is to keep you motivated and efficient throughout the repayment journey.
You can track your repayment progress by creating a spreadsheet where you insert all your debts, balances, and monthly payment. Record each payment you make and monitor your balance.
Another way you can track your repayment progress is by using a free credit monitoring service to view your accounts weekly. Also, you can use a physical or digital calendar to plan the time each debt will be paid off.
Conclusion
It might take extra effort and discipline to clear your debts, but it's definitely worth it in the end. The simple steps provided here make creating a debt elimination plan that works as easy as ABC.
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