Develop a Plan to Pay down debt
February 17, 2020
While it may seem overwhelming, most of us face debt similarly: one step at a time. If you don't know where to start, we have put together a list of how to pay off debt, even when it seems impossible.
Make a list of your debts
The first step in creating a debt settlement plan is to calculate what and how much you owe. There are a few ways to do this. You can make a list of your debt that includes the name of the lender (or credit card company), the amount due, the interest rate, and the minimum amount due each month. Another way to get a list of your debt is by reviewing your credit report. You can get your free annual credit report here. Your credit report will list most, if not all, your corporate debt obligations that report to the top three credit bureaus.
Rank your debts
The next step is to rank your debts from the smallest amount to the largest - this will help get the momentum going. Some experts suggest ranking from highest to lowest interest rate. You are free to choose which ranking system works best for you, the important thing here is to stick to the list.
Create a repayment plan
Now that you have a better understanding of the big picture, you can create a payment plan. There are two popular strategies: debt snowball and debt avalanche.
· Debt Snowball: This method focuses on paying off the smallest debt first, keeping minimum monthly payments on all other debts. As each debt is repaid, the money that was used for the previous debt is "snow-covered" and used to repay the next smaller debt. You repeat this tactic until all debts are paid off. While this strategy may not save you so much money at interest rates, some people find it motivating to pay one bill at a time.
· Debt Avalanche: debt avalanche focuses on paying off the debt with the highest interest rate first, paying minimum monthly payments on all other debt. Consequently, you move on the debt with the second-highest interest rate and repeat the process until all debts are gone.
Find ways to earn more income
Debt list is made, details are in check, payment plan strategy selected. The third step is to consider getting some extra money to help you repay your debt. One way to do this is to reduce spending so that you have more money to invest in your debt repayment plan. Another option is to find a part-time job or freelance gig to increase your income. Also, you can use monies received from gifts, bonuses, or tax returns to pay your debt off faster. Keeping a monthly budget will also help you find extra money.
Keep expenses under control
One of the main reasons people struggle to get out of debt is their expenses. It is hard to change your lifestyle so drastically, but trust me, it's worth it. Budgeting is exceptionally crucial when paying off debt. But most importantly, being disciplined about your plan. A simple budget spreadsheet or using a finance app can help you manage your day-to-day expenses, spending, income, and debt. Now that you are trying to pay a debt, it should become a priority.
The help of a financial professional will come in handy when dealing with debt issues. They can help you develop a personal financial plan that will help you develop a healthy financial habit. Contact one of Bounds Accounting's representatives to learn how we can help you.