Paying off debt is an important step towards financial freedom and financial security. Whether you have student debt, credit card debt, medical debt, or a little of each, it's important to develop a strategy to pay it off and move on with your life.
There are hundreds, or maybe thousands, of debt repayment strategies on the internet, but when it comes down to it, you need a strategy that works for you. That may not be the same strategy that works for your friend or coworker! So, instead of following a pre-published debt repayment strategy that doesn't quite seem to fit your lifestyle, start with the steps below to craft your own, personalized debt payoff plan.
1. List all of your debts.
It's really hard to start paying off your debts if you don't know what your debts are. Sit down and sort through your financial paperwork. List all of your debts in one document. Include the creditor's name, how much you owe, the interest rate on the debt, and the date that payments are due each month. Also, specify which type of debt each account is.
2. Decide between the snowball and avalanche methods.
There are two main methods that people generally use to pay off debt. You don't have to adhere to either of these methods, but they have brought success to many people, so it is wise to choose one.
The snowball method has you pay off your debts in order from smallest to largest. So, if you have $5,000, $7,000, and $10,000 loans, you would pay them off in that order. This method is great for people who need a lot of motivation to pay off debt. Paying off that first, small debt will help you feel empowered.
The avalanche method has you pay off your debts in order from highest to lowest interest rate. This method tends to save you the most money, but some people find it overwhelming if their highest-interest loan is a big one.
Regardless of which option you choose, you'll proceed by making minimum payments on all debts other than the one you're paying off first. You'll put all of your extra funds towards that first debt, finish paying it, and then start funneling all your funds to the next debt.
3. Figure out how much money you have to contribute.
If you don't already have a budget, make one! Make sure you subtract, from your income, all of your bills, including minimum payments on all but the first debt on your payoff list. Whatever money you have left will be funneled towards that first debt. For instance, if you have $1,000 a month left after paying all of your bills, you'll pay $1,000 a month towards your first debt.
4. Find ways to contribute more money to debt payoff.
Throughout this process, many people discover that they don't have as much to contribute to debt payoff as they'd like. So then, what you need to do, is find more money. You can cut back other categories of your budget. For example, if you're spending $500 a month on takeout, you can cut that back to $250 and put an extra $250 a month towards debt. You can also increase your income. Work some extra overtime hours, take on a part-time job, or do some gig work.
Debt repayment is an important journey, but it's not always an easy one. Start off with a strong plan that works for you, and then stick with the plan. When you pay off that first debt, you'll feel empowered to keep moving forward.