We’ve often talked about how to get rid of debt. But this time, we’d like to cover an actionable plan comprised of simple steps you can perform to fully eliminate your debt.
While some families I know can pay off their credit cards each month, most people I know maintain mortgages, car loans, credit card and other debt. In the past, I felt like I was climbing a mountain that I’d never pay off, but I learned how to set up a debt repayment plan. The process isn’t too complicated to set up and with consistency, I found out that I could find zero balances at the end of my hike.
How To Get Out of Debt: Set Up A Debt Repayment Plan
Allow me to go through what I’ve done to set up my personal debt reduction program.
1. List your debts.
First off, I took all my latest billing statements and listed all my debts. If spreadsheets aren’t your thing, just start with the nearest sheet of blank paper and start writing down items like:
- credit cards
- auto loans
- student loans
- personal loans
- medical bills
2. Find a lower interest rate for your debts if you can.
Debt consolidation is something I’m investigating for myself. You may want to consider consolidating your debt if it makes sense for your situation. If you have good credit, check on debt consolidation opportunities at Lending Club, a solid peer to peer lender. Or you can choose to commit to using a balance transfer credit card that offers 0% APR for a limited time — just make sure you pay off your balance before that intro rate period is up, or you’ll be stuck with some expensive credit card debt at much higher rates! If I do this right, this can certainly speed up my debt reduction process.
3. Add up your debts.
Next, I added the amounts I owed (from all sources) and the interest rate for each debt. For example, let’s say I owed the following:
|Debt Name||Amount Owed||Interest Rate|
|Visa Credit Card||$15,000.00||18%|
|MasterCard Credit Card||$3,600.00||15%|
|Debt Consolidation Loan||$5,000.00||8%|
While a grand total of $40,400 might make anyone woozy, I’m sticking with the program and focusing on the amount I want to repay each month. I then asked a debt calculator how long it would take to pay off my Visa if I paid only the credit card minimum payment due each month. When the calculator came back with an answer of 32 years, I decided I needed to pay more.
4. Set your monthly payment amounts.
So how did I cut down the payback time so I wouldn’t be in debt for the rest of my life? Here’s an “easy” approach: I first looked at the minimum amounts due for each of my bills, then came up with a grand total. For the list above, let’s say the minimum total amount for all my bills is $520. For each day of my debt management plan, I resolved to pay $520 each month.
Now over time, my balance should start shrinking, and eventually, my credit card statements will show a readjusted minimum payment; but I’m planning to keep paying $520 overall to shrink the debt in a reasonable amount of time. Once I finish paying off one debt, I need to apply the payment to the next debt in line, a tactic familiar to many of us thanks to Dave Ramsay’s Debt Snowball plan.
5. Decide which debts to focus on first.
How can I decide which debts to pay off first? Some experts, like Suze Orman, have favored paying off the debts with the highest interest rate first. That benefits you because you’ll end up paying less money over time, if you do the math. Also, you may want to call your credit card company if you’d like to negotiate for lower interest rates.
However, Dave Ramsey argues that paying off the smallest debts first is going to give you the push you need to continue your plan. For example, if I had a smaller zero-interest hospital bill of $400, I could pay it off within months — and kick that worry out of my head all that much sooner. If I choose to tackle larger bills at a highest interest rate first, it may be a while before I retire this debt and feel like I’ve accomplished something.
6. Pay more whenever possible.
Five years or longer can seem like forever on a debt repayment plan. To reduce the amount of time spent on the plan, I learned to send in extra payments when I could, and eventually, I began to send in a larger amount on a regular basis. Cutting my other expenses helped, too. I became a frugal shopper for groceries and household items. In addition, I avoided trips to the mall so I wouldn’t be tempted to spend too much. For those with big debts, why not take second jobs? These other debt elimination tips are also worth trying out.
I’ve also discovered Paid Twice’s Snowflaking method. With snowflaking, no amount is too small to be applied to a debt repayment plan. If my credit card company doesn’t limit the number of times I can pay them online each month, then I can take the extra $5 rattling in my old PayPal account and send it in to the debt at the top of my list.
7. Find help if you need it!
Although many people can tackle their debt repayment plans on their own, you may decide that you need the structure of a debt counseling agency’s program. If you go this route, you may be able to check in with a counselor to discuss your questions or problems for free or for a nominal amount each month. The National Foundation for Credit Counseling can help you locate a credit counselor. CNN Money has a debt reduction tool to assist you, too!
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