Are you motivated to pay off your debts, but aren’t sure where to start? If so, you don’t need to solve it on your own. There are tried and true steps anyone can take to go from wishing their debt would go away to actually reducing what they owe.
If you’re ready to get out of debt, here’s a step-by-step process you can start with today to get on the right path.
Before you can make a plan of attack for your debt, you need to be clear about what you’re up against. Instead of guessing at the details (and potentially getting it wrong), you’ll need to take a look at your financial statements to get the following information for each debt:
To make sure you’re not missing anything, check your credit reports as well. You can get your reports from all three credit bureaus for free at AnnualCreditReport.com once a week.
Next, calculate the total amount you owe each month on your debt. To do this, add up the minimum payment amounts due for each account.
Keep in mind that making the minimum payments on your debts will help you avoid late fees and other penalties, such as damage to your credit score. So if your budget is tight, make sure you pay at least the minimum amount each month.
That being said, this is not a good plan to get out of debt. This is because the interest charges on your debts will cause your balances to continue growing despite the payments you are making.
For example, if you owe $3,000 on a credit card with a 21% annual interest rate and you make a minimum payment of $55 a month, it will take you almost 15 years to pay off the card and you will pay $6,800 in interest.
To significantly reduce your debt, you will need to pay more of your balance each month. Which brings us to the next step.
Once you know what your total minimum debt payments are, it’s time to calculate how much extra money you can put toward your debt.
To figure this out, you’ll need to compare your monthly income to your essential expenses, including housing, utilities, food, transportation, and healthcare. In other words, you will need to create a budget.
If you’re not sure how much each of your expenses is, take a look at your recent financial statements to make your best estimate of the average monthly cost.
Even if you only have $100 left over to put toward extra debt payments each month, it’s worth doing. If you consider the credit card example we used earlier, adding an extra $100 a month to the payment would mean paying off the account in just two years and saving $6,105 in interest.
Read more: Budgeting Basics: What Are Monthly Expenses?
The more monthly cash flow you can free up to pay off your debts, the faster you will become debt-free. Plus, paying off debt early means saving more money on interest.
Here are some ways you could free up extra money to pay off your debts:
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Review financial statements: Review your bank and credit card statements to find automatic charges and subscriptions you can cancel.
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Change what is not necessary: When it comes to discretionary spending, like dining out and traveling, swap them for cheaper alternatives or cut them out completely until you get your debt under control.
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Increase your income: Look for ways to increase your income, such as working overtime, finding a new job, or starting a side job. Allocate all additional profits to pay off the debt.
Now that you know how much money you have to pay off the debt, you’ll need to decide how to approach paying off the debt.
You will be surprised by the number of different options available. Depending on how much money you have to pay your debts and the type of debt you have, one or more of the following debt payment strategies could be best for you:
If you are unsure which of these plans best suits your needs and preferences, you can contact an NFCC-certified credit counselor for guidance. They will review your budget, debt, and credit and make personalized recommendations on how to move forward.
Read more: Debt Snowball vs. Debt Avalanche: Which Method is Better for Paying Off Debt?
Deciding on a debt repayment strategy is a step in the right direction. But next, you need to back your strategy with funds. Be sure to include paying off your debt as an “expense” in your budget. One of the best ways to make sure everything goes as planned is to set up automatic payments on your debt.
Even the best laid plans can go wrong. If you run into obstacles in your debt repayment process, such as an unexpected expense or a reduction in income, don’t give up.
Instead, adjust your budget numbers and keep moving forward. You may need to reduce your monthly debt payments for a period of time, but that doesn’t mean you should scrap your plan entirely.