Debt can be one of the most difficult burdens to overcome. It’s difficult to feel optimistic about your situation when you are struggling with debt. This is especially true if you don’t have a plan for getting rid of it.
A good plan — one that allows you to take action — can make a big difference in how you feel about your finances. If you want to boost your debt pay down, a good plan is the best place to start. Once you have an action plan that allows you to get started immediately, you will be more likely to succeed in your efforts.
Honestly evaluate your situation
The first step is often the hardest: Honestly evaluate your current position. Where do you stand with your finances? Take a look at where you have been spending your money, and understand where your money comes from to begin with.
Face your debt full-on, and also acknowledge mistakes you might have made. Be realistic about where you stand, and realize that you need to make changes in the way you approach money. Once you have a solid idea of where you stand, you are serious about changing your situation, you will be ready to move forward.
Cut back on your spending
“No matter how much you put toward your credit cards, none of it will matter if you still spend more than you earn each month,” says Lori Atwood of Fearless Finance. “It’s a vicious cycle.”
Your first step is to stop digging that debt hole. Look at your spending, and figure out where you can cut back. Target the unnecessary items first, trimming the extra fat from your budget. Once you bring your normal spending in line with your income, you will be able to move forward with a plan to get out of debt.
List all your debts and their details
Next, list all of your debts and their details. Each debt should include the balance, minimum payment, and interest rate.
You can order your debts how you like. Some consumers prefer to order their debts from smallest to largest, preferring to tackle the smallest debt first in order to get a quick psychological victory. Others like the idea of starting with the highest-interest loan so that they spend less in interest, and pay off their debt faster.
Choose which method you think is most likely to work for you. Be realistic about your abilities and thought processes. The truth is that any method is better than no method, since the goal is to be able to stick with your plan.
Decide how much you can put toward debt reduction
The next phase is figuring out how much extra you can put toward debt reduction each month. When you cut back your spending to match your income, you should have set matters up to ensure that you can make your minimum payments on all your loans.
Now, you need to determine how much extra you can use for debt reduction. Be realistic about this number, too. Some of the things to consider as you decide how much extra you can put toward debt reduction each month should include:
- Family obligations, and whether the rest of your family is on board with the efforts.
- Your emergency fund and retirement account contributions. Ideally, you should be putting at least a small amount of money aside if you can.
- Whether or not you can earn extra money to speed up the process.
You might need to further cut expenses, or find ways to earn more money in order to come up with an extra amount for debt reduction.
Remember: Even if you can’t put as much as you would like, every bit helps. It’s better to move slow and steady than to make no real progress at all.
Make an extra payment to your top debt each month
Finally, it’s time to put your plan in action. Put the amount that you have decided on toward your top debt each month. Even if it’s only an extra $50 a month, you should put that toward the first debt on your list. In the meantime, you should keep paying the minimum toward your other debts.
One way to continue making progress on your other debts, even as you focus on your top debt, is to use “payment fixing.” Matt Bell, from Sound Mind Investing, suggests that you “fix” the minimum payments on all your other debts at the amount they are at when you start the plan.
“If you don’t take on any more debt and make the minimum monthly payment required by the creditor, your monthly payment will actually decline a little bit each month,” he says. “If you simply keep paying today’s required minimum, even when the creditor starts requiring less, you’ll be out of debt way faster.”
Apply this principle to all of your debts, even as you make an extra payment for your top debt each month, and your whole plan will speed up. Once you pay off one debt, you can take your extra payment, plus the first debt’s “fixed” minimum, and use that to start on the next debt on your list.
Making your extra payment separate from your minimum can be a good way to get more out of it, since it helps you keep the total amount you put toward your debt steady each month, and it makes that amount more effective as you pay down your debts. As you move from debt to debt, you will accelerate your pay down, since more and more will be concentrated successive loans.