Debt is one of the most common causes of financial stress. An average American carries a debt balance of $96,371, and this could comprise credit card balances, student and auto loans, and mortgages. Meanwhile, the average salary is around $55,600—according to the Bureau of Labor Statistics.
So the question now is, how can people become debt-free when they don’t earn enough to pay down their balances? But as much as it seems farfetched, people can regain control of their finances if they know how to create a debt payoff plan.
Sometimes you can’t manage your debts by simply trying to make the minimum monthly payments. You have to take a more serious approach and develop a strategy that will help you complete the debt repayments on time even if you earn low income. Fortunately, this blog post is here to help!
As you read on, you will learn the step-by-step guide for creating a perfect debt repayment plan.
What’s A Debt Payoff Plan?
A debt payoff plan is a set of specific, actionable steps that you can take to clear your debt balances. It helps you to have a comprehensive look at your debt situation and what is required of you to be debt-free as soon as possible.
Creating a debt payoff plan is one way to ensure you have a financially secure future. Without debt payments eating into your finances every month, you’ll be free to invest in your retirement accounts and reach other important money goals.
How To Create A Debt Payoff Plan In 6 Easy Steps
There are several perks that come with being debt-free, but one major benefit is the peace of mind you’ll enjoy when you no longer have to make compulsory payments toward your balances every month. Are you ready to kickstart your debt repayment journey? Here are the steps to follow:
Step 1: Examine How Much Debt You Have
Knowing how much debt you have is the first step to consider when learning how to create a debt payoff plan. Although seeing those numbers could make you nervous, all it takes to create a plan is knowing where you stand financially.
To get started, you can use a spreadsheet or pen and paper to make a list of all of your debts and the total balance. Both revolving loans (credit card balances) and installment loans (student loans, mortgages, auto loans, etc.) should be included in your debt total.
If you want to make this process simpler, use a budgeting tool like Empower (formerly known as Personal Capital) to make your calculations.
Moreover, getting a clear picture of your debt can also be accomplished by pulling your credit report.
Along with other factors that affect your credit score, such as the number of recent queries and payment history, credit reports also include a record of all of your outstanding debt. While you’re at it, check your report for errors. Ensure that the balances and accounts you see are accurate and current.
Step 2: Choose Your Preferred Debt Payoff Method
This is one of the major steps to setting up a debt repayment plan. Rather than trying to pay your debt aimlessly, you need to pick a method that gives structure to the repayment process.
The debt avalanche method and the debt snowball method are the two most popular techniques for paying off debt, and each of these plans has its pros and cons.
The debt snowball method entails paying off the smallest debt balance before focusing on the bigger ones. It is a smart strategy that allows you to get momentum early on and maintain motivation to pay off the remaining balances.
When it comes to using the debt avalanche method, the highest APR debt is paid off first. Since this strategy prioritizes balances with higher interest rates, you will probably end up saving some money over time.
Every debt repayment plan has its benefits and downsides, so it’s important to find a method that is peculiar to your situation. You can even devise an entirely new repayment plan or adjust your strategies as you go to suit your needs and lifestyle.
Step 3: Determine Your Baseline Budget
Budgeting is also another essential step to take if you don’t know how to create a debt payoff plan. It’s important you have a better understanding of where your money goes each month. You need to review your spending occasionally as well. Without a working budget, you can’t do this every month.
But at this point, you aren’t just budgeting your income. The goal here is to figure out your baseline budget or the bare minimum required to cover your essential expenses. Why is this important? You have to do this in order to determine how much you have left (after paying bills) to organize your debt payment.
Look for places where you could cut back on spending and use the money you save to pay off debt. Every little amount helps when you’re attempting to tackle a large balance. However, in order to pay off your debt more quickly, you might want to consider making larger sacrifices (such as selling your car or moving into a cheaper apartment).
More importantly, try using a budgeting tool like You Need A Budget (YNAB) or Mint if you want to keep a closer eye on your spending. Every dollar you budget with this budgeting tool is allocated to a spending bucket, making it quite easy to account for all your expenses at the end of the month.
Step 4: Determine Disposable Income
Having established your baseline budget and figured out how much is required for your minimum payments, you can move on to check if you have any disposable income to make extra payments.
When you subtract your baseline cost from your salary, what you have left can be considered a disposable income. You should use this to pay off debts and maybe cover some variable costs.
Determine how much of your discretionary income you want to set aside for debt repayment and how much you want to keep for yourself. Also, if you have a partner who contributes to the monthly budget, you can allow them to cover most of the basic expenses. Then you can use your remaining income to speed up debt repayment.
Step 5: Save On Interest
Consider this if you are looking for the best tips to create a debt payoff plan.
Transferring your balance from a high-interest credit card to a credit card with a 0% annual percentage rate (APR) that gives no interest for up to 20 months is a wise approach to managing your debt. This can help you avoid spending a lot of money on interest. What you save can then be contributed back to paying off your balances faster.
Balance transfers can also be substituted with personal loans. Although personal loan interest rates are rarely 0%, they are usually less than credit card interest rates.
Step 6: Track Your Progress And Stay Accountable
Paying off large amounts of debt can be a challenging task. This is why it’s important to find ways to stay motivated throughout this job.
Find a buddy or partner who will encourage you to stick to your plan. You’ll need this support if you happen to start falling off with the plan later on.
But most importantly, ensure you recognize each milestone you achieve. For instance, if you successfully pay off a small balance while using the debt snowball method, that’s something to be grateful for. You can derive strength to keep pressing on when you appreciate the little progress you make.
Use your calendar to create a monthly money date to keep track of your progress and complete tasks. When you reach certain goals, think of inexpensive ways to celebrate (cook a great dinner, throw a dance party, or get yourself a modest reward like a nice bottle of wine.) This is one of the key aspects of learning how to create a debt repayment plan.
5 Tips To Stick To Your Debt Payoff Plan
Starting a debt payoff plan is one thing, finishing the repayment is another goal. To help you stay on track till you succeed, here are some tips to stick to your debt payoff plan:
1. Ensure You Choose A Realistic Payoff Method
If you are feeling very anxious about your debt payoff method, then maybe it’s not the right strategy for you. You should know that your financial situation is unique—different from other people’s circumstances. So just because one debt payoff method works for someone doesn’t mean it will work perfectly for you as well. Your priority should be finding a realistic payoff strategy.
If the debt avalanche method seems perfect for your situation, then go ahead with it. If debt consolidation seems to be the realistic solution, stick with it. When you employ a realistic approach to managing your debt, you’ll likely pull through.
2. Make Extra Payments When You Can
When trying to be debt-free, one of the common questions that come to mind is, how fast can I finish paying off the balances? Well, the number of years you spend paying off debt depends on how large your balances are. Notwithstanding, you can quicken the repayment by making extra payments toward your debt.
The good thing about making extra payments is that they don’t have to be a lot of money. Whether it’s $50 or $100, consider every payment progress.
Mind you, paying more than the minimum would require you to be quite disciplined with your finances. You’ll have to cut down your spending and monitor your income more closely. This is how to create a debt payoff plan and stick to it.
3. Stick To Your Budget
Sticking to a budget is definitely part of the process as you learn how to create a debt payoff plan.
When you budget your income once a month, be sure you don’t live beyond your means. Spend only on your essentials and avoid unnecessary expenses.
You don’t want to splurge money on expensive dinners, fancy clothes, or a large apartment when trying to become debt-free. The more you stick to your monthly budget, the easier it is to stay committed to your debt payoff plan.
Besides, if you need help sticking to your budget, check out this post where several tips and strategies have been outlined for you.
4. Stop Taking On More Debt
You shouldn’t use a credit card or apply for a car loan while trying to pay off debt. It just doesn’t make sense. If you do this, you are simply making it impossible for you to become debt-free.
Ditch your credit cards. Don’t receive any personal loans. If you need more money to sort out your bills, then maybe you should increase your income. Find a side hustle or small business that would generate extra money to support your salary.
When you stop taking on more debt, it becomes easier to clear the outstanding balances.
5. Study Other People’s Success Stories
You probably have heard of Dave Ramsey—one of America’s most brilliant financial advisors. Before Dave became quite successful, he used to be deep in debt. His personal finance was a mess. But somehow, he was able to turn his situation around, pay off all his debt, and establish a very profitable business.
Today, he’s helping millions of people achieve the same goal. Dave Ramsey is one of those success stories that should inspire you. It’s enough proof that you too can be debt-free and financially successful.
Quick Summary: How To Create A Debt Payoff Plan
Handling several debt balances can be overwhelming, but you can find a way out if you learn how to create a debt payoff plan. But when it’s time to decide on a repayment strategy, you must understand how it benefits your financial situation and makes the debt payments easier.
Also, don’t forget to keep your spending in check with a viable budget. Aside from curbing your spending, a monthly budget will help you prioritize essential bills, including debt payments.
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