Would you like to create a debt repayment plan? Some people might think that this is not necessary. They just go ahead and try to make payments based on the original terms of their debts. They don’t think that it’s worth the time to analyze their financial situation so they can create a repayment plan.
But if you really understand how this plan can help improve your financial position, you’ll never think it’s a waste of time. You’ll spend as much time as needed to make sure you can create the best repayment plan that’ll help you get out of debt.
If you take a look at the statistics right now, you’ll realize that a lot of people are in need of an official repayment plan. During the 3rd quarter of 2020, the total household debt rose by $87 billion. That’s a huge increase that Americans should take seriously. If they’re not careful, this might continue to rise and compromise their financial future. And if they take a long time to pay off their debts, they’ll have to spend a lot of money on interest payments. That’s a huge waste of money that could have been used to improve your personal finances.
If that’s not enough reason to aggressively pay off debt, then what is?
5-steps to form an effective debt repayment plan
If you’re convinced that you need a debt repayment plan, there’s one thing you need to remember. It’s not just about having a plan. You need to make sure that you have an effective plan.
How can you do that? Here are 5 steps that you need to follow to make this happen.
Step 1: List down your debts
Start with a list. Identify all the debts that you owe. It’s not enough that you take note of the total amount.
For instance, reports reveal that the average American consumer owes a total of $51,900 in debt. But what is the breakdown of that debt? The same report reveals the order of debt. Based on what has the most balance, the debts are mortgages, student loans, auto loans, credit card debts, home equity lines of credit, and other debts (personal loans, etc). You need to consider all of these debts because it’ll help you create an accurate repayment plan. Make sure you don’t miss out on all the debts that you owe.
Step 2: Rank debts according to priority
Once you have the list of debts that you owe, it’s time to rank them according to priority. There are two ways for you to do this.
The first is to base it on the debt type. To get this done, you have to understand what are the type of debts that you owe. The general rule is to prioritize the secured debts than unsecured ones. So that means the mortgage and auto loans should go first rather than credit cards. Why? Because if you can’t pay off your secured loans, the bank can take your house or car as a payment replacement. If you have student loans, that should be higher in priority because, in the event of a bankruptcy, you can’t have this discharged.
The second way to prioritize your debt is based on the details. You have 2 options here as well. You can rank it according to which debt has the highest interest rate. Doing this will help you pay off the debt that costs you more in interest. It will help you save money. The other option is to rank your debts according to which one has the smallest balance. If you choose this option, you’ll experience a faster win – paying off a debt completely. This is a great option for those who need the motivation to completely pay off their debts.
Step 3: Create a timeline for each debt
After ranking your debts according to priority, you have to create a timeline for each debt. This is when your debt repayment plan will start to take shape. Take each debt that you owe and create a timeline for each.
To do this, you need to have a current idea of what your budget plan looks like. Check your income and look at the different expenses that you need to pay to survive. Anything that’s left is to be used for your debt payments.
Once you’ve figured out what your total debt payment fund is, you have to check if it an cover the minimum payment of all your debts. If it can, then that’s good news. Any extra amount can be used to pay more towards the priority debts. This will help you pay them off faster.
If not, then you need to do more work. You might have to call your creditors and lenders to ask for different terms. Like maybe a lower interest rate or monthly payment.
Your debt payments will also dictate the best debt relief program you can use – whether it’s debt consolidation, debt management, credit counseling, or debt settlement.
By the end of this step, you should have a better grasp of how long your debt repayment plan will take to complete.
Step 4: Monitor your progress
The next step is to monitor your progress. Even after you’ve created your repayment plan, you have to make sure that you commit to it no matter what. All types of financial plans can make your life better but only if you stick to them until the end. That means you have to see it until its completion.
To do that, you have to monitor your progress at all times. Don’t just make payments and then forget about it. Always take a look at your debt repayment plan. Why?
There are two reasons why. The first is to make sure that you are paying the right debt. You don’t want to send a different payment amount to another creditor by mistake.
The other reason is for motivation purposes. The more you see your progress, the more fulfilled you’ll feel. And sometimes, that’s all you need to keep sending your payments month after month. Soon, you’ll find yourself making that last payment and being free from debt – finally.
Step 5: Find a way to increase income
While the previous step seems like the last one – it’s not. Although you’re monitoring the progress of your debt repayment plan, doing this last step will help speed things up along.
If you increase your income, you can also pay more towards your debts. The more you pay each month, the faster you can get out of debt. And we all know that there are many benefits to that.
First of all, you can save a lot of money on interest payments. You can also get rid of the stress that usually comes with debt. And once you are done paying off everything you owe, you can start pursuing other goals that you have. That way, you can aggressively improve your financial situation.
So how do you increase your income? There are so many ways to do that. You can get a side-gig. Check the Internet for online jobs. The great thing about online jobs is you have a lot of opportunities even from across the ocean. So be resourceful. There’s always an opportunity if you’re persistent enough to find one.
Why you need a debt repayment plan
Why is it important? Because having a debt repayment plan will guide you as you pay off all your credit obligations. It’ll ensure that you can stick to making payments every month. Usually, paying off debt takes time. So having a plan will really make things easier for you.
Here are three reasons that’ll explain this further.
To stay organized
Having a plan helps you organize all your efforts. That way, you don’t just keep on acting. All your actions are towards a specific goal. This will help conserve your energy. It’ll also help you identify the best course of action that’ll give the best results that you’re looking for.
To guarantee debt freedom
With your organized efforts, it’ll be easier for you to achieve debt freedom – not to mention faster too. There are many ways to eliminate debt. But without an actual plan, it’s very easy to make mistakes. So try to minimize the errors if you can.
To support your financial goals
The last reason is for your financial goals. When you have a debt repayment plan, debt freedom is easier to achieve. When that happens, you’ll have a clear path towards your other financial goals.
In fact, even if you need to work on some of your financial goals while paying off your debts, that’s okay. You can arrange your plan to accommodate that. It’s all up to you and what you want to achieve at the moment.