How to Set Up a Debt Repayment Plan in 6 Easy Steps
Once you have decided it's time to get out of debt, one of the first steps you need to take to achieve that goal is set up a debt payment plan.
Not only will a repayment plan keep you on task, it will also help you get out of debt faster since you'll be able to see real progress. Another plus of a debt repayment plan? By applying your extra money to one debt at a time, you will significantly speed up the debt repayment process. If you set up a debt repayment plan – and stick to it – you will be surprised at how quickly you can pay off your debt.
Follow these 6 easy steps to set up a debt repayment plan.
1. Make a List of Your Debts
This list should also include all of your debt: from credit cards and personal loans to student loans, even your mortgage. If you owe money to family and friends you should also include it on your list.
2. Rank Your Debts
Next, you should rank your debts in the order you want to pay them off. Some experts recommend going from the smallest amount to the largest since this helps get the momentum going.
Others recommend listing the debts from the highest to the lowest interest rate since this will save you the most money. The order you choose is up to you, but the important thing is to stick to the list once you make it.
3. Find Extra Money to Pay Your Debts
Now, you need to decide how much extra money you have a month to pay towards your debt. You may need to cut back spending in other areas so that you have the money to put towards your debt payment plan.
Another option is to take on a part-time job or to pick up overtime hours at your current job to boost your earning power. You can also sell items to earn extra money for your debt payment plan. Additionally, you may want to apply all the money you receive from gifts, bonuses or tax returns to your debt in order to pay it off more quickly. Sticking to a monthly budget will also help you find extra money to apply to your debt.
4. Focus on One Debt at a Time
In order to succeed with your debt repayment plan, you should focus on paying off the first debt on your list. Put all extra money toward this first debt, while paying the minimum on all other payments.
Here's the reasoning: When you focus on one debt at a time, you are able to 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 spread your extra money over several debts, you are lessening the impact it has on your debt because you are paying more interest.
5. Move onto the Next Debt on Your List
Once you have paid off the first debt on your list, it's time to move onto the next debt, while paying the remaining debts' minimum balances.
Continue to do this until you have crossed all your debts off your list. And keep in mind that when you first start working on your plan, it may seem like it will take forever to pay off your first debt, but as you work down your list and gain momentum, you'll be surprised at how quickly you can pay off the next one.
6. Build Up Your Savings
Once you've paid off all your debt, now is the time to focus on building up a savings account. This will help prevent you from going back into debt in the future. An emergency fund is one of the best tools that you can use to take control of your finances and avoid going into debt.
And when it comes to using credit cards in the future, use them responsibly or not at all. Your future self will thank you.
- Review your bank or credit card's policies about extra payments and principal payments on a loan. This will help you get the most out of your extra payments each month. Some banks will charge you an extra payment fee, and others will not apply the extra payment just to the principal balance. If you understand how they charge, you will be able to work out a strategy that will help you apply the majority of the money to your principal each month.
- A small emergency fund of about one month's salary can help you prevent from using your credit cards again while you are working on paying off your debt. Build this up first before you start applying extra money toward your debt.
Updated by Rachel Morgan Cautero.