Plans are a good thing. Sure, it’s fun to wing it sometimes like on the weekend or when travelling. But when it comes to debt repayment, a plan will serve you much better than if you just go with the flow. That’s because “the flow” makes it too easy to spend extra money and get pushed off your path toward debt freedom.
When you set up your personal debt repayment plan, then you have the chance to get your debt paid off early, and to save on interest in the meantime.
Did I mention that setting up a plan puts you back in control? I don’t know about you, but I like feeling like I have an ounce of control over my life. If nothing else, it bolsters my confidence and ensures that I will see many of my plans through.
So how do you go about making your own debt repayment plan?
Scope it Out by Gathering Your Debts
Which debts will you be paying off? If you do not know all of the debts you currently have, then there are two ways you can gather this information. The first is to go through that shoebox/filing cabinet/pile or wherever you keep your statements and open everything up. Record each debt on a sheet of paper (or excel if you’re geeky about numbers and formulas like I am), and keep one bill for each debt so that you have the contact information, interest rate, and other information for each of your debts. Put all of these into a folder and label it so that you won’t need to do this again.
As an alternative, sign up for ReadyForZero and link up your accounts so you can see all of your debts in one place, along with your balance and interest rate information.
It also doesn’t hurt to go to AnnualCreditReport.com and order your free credit reports. Each of your debts should be listed (but of course any loans from family and friends will not). By law, you can order a copy of each of your three credit reports for free once per year. Note: your annual credit reports may or may not have interest rates for your debts, but they generally will contain a way to contact the creditor so that you can find this information out.
Determine Your Bottom Line Amount
Your next task is to figure out your bottom line amount for how much you have to pay each month on each of your debts. Get this figure by adding up each of your minimum monthly payments due. For example, if your student loans have a minimum payment of $300 and your credit card has a minimum payment of $150, then your total would be $450 per month. If you can afford to pay more than that, then you’ll be ready to start getting out of debt faster. If you can’t meet your minimum payments each month, then you may want to look into debt consolidation or other options.
Prioritize Your Debts and Come Up with an Order
It’s time to prioritize which debts you want to pay off first all the way through to the last. Why would you do this? It turns out that choosing some debts to prioritize over others can actually shave months and even years off of your debt repayment schedule (if you put extra money towards the debt on top of your list).
For example, by ordering your list from highest interest rate to lowest interest rate (also known as the Avalanche method), and throwing any extra money you can find towards the highest interest rate debt at the top of your list first, you will pay off your debts sooner. Of course you will continue paying the minimum due on each account no matter where it falls in the lineup.
As you pay that first debt off early, you then roll the entire payment you were making to it (minimum due plus any extra money you can find) towards the next debt down on your list. Rinse and repeat until you reach the bottom.
Play Around with Your Debt Payoff Date
Now comes the fun part where you can hopefully accelerate your debt payoff date. ReadyForZero has an awesome tool where you can input your debts, and then play around with your payoff date. Want to do something crazy, like pay off $15,000 of debt in a year? Simply move the slider bar in your account to one year and see how much money you would need to send in each month in order to accomplish this goal. Want to be debt-free by 2020? See how much money you will need to send in order to declare 2020 your debt freedom year.
It’s your turn. Come up with a debt repayment plan, and then share with us your new debt freedom date in the comments below!