Why do you need a debt payment plan? Because it can increase the chances that you’ll get out of debt. Without a plan, you’ll just be blindly sending your payments to your creditors and lenders. Sure, the original repayment terms are legit and fair.
But is it the best payment for you? Is it the best way to pay off your debts?
If you really scrutinize it, you’ll realize that it’s not. You see, there are many ways to pay off your debts. Depending on your financial situation, there’s a debt solution that’ll suit you. If you choose the right option, you can benefit from getting more savings or achieving debt freedom faster.
To know what you should choose, you need to come up with a debt payment plan. It’ll force you to scrutinize your debt and finances. This will give you an idea about your current situation – like how bad things are. Or what you need to do to complete all your payments.
If you fail to do this, your debt can cost you a lot of money. For instance, with the credit card balance and interest rates, the average American is expected to pay around $1,200 on interest this year.
Do you want to waste that money on the interest alone? Of course not! This is why it’s important for you to get serious about getting out of debt.
For that to happen, you need an effective debt payment plan.
4 steps to create a debt payment plan
Fortunately, there are concrete steps that you can follow to create this plan. Take note that it’s not enough for you to create a repayment plan. It has to be an effective one.
To do that, you have to follow these 4 simple steps.
Make a list of your debts
It’s hard to determine a solution if you don’t know the problem. So the best way to start is to make a list of all your debts. If you want to learn how to manage your finances properly, this is one of the habits that you need to have anyway.
When you create a list of your debts, make sure that you provide all the details. This includes the remaining balance, interest rate, due date, monthly payment requirement, etc. The overview that you’ll get will make you feel more in control of your situation.
Sometimes, we think that our debts are so bad that it seems impossible to pay them all off. But if you list everything down, it’s not so bad after all! It’ll give you the confidence you need to complete your payments. You’ll feel more in control of the situation – and your debts won’t give you sleepless nights and anxiety anymore.
And if you make this a habit – guess what? You’ll never have debt creep up on you again. It won’t reach a point where it’s too hard for you to pay off – because you are listing it and monitoring it closely.
Rank your debts according to priority
After you’ve made a list of all your debts, the next step is to rank them according to your priority. There are two ways to do this.
The first is to rank it according to the interest. The debt with the highest interest rate will be considered the priority. The next highest will come after it – and so on. This is a great option for those who want to save money on their debt payments. After all, the longer it takes for you to pay off your high-interest debts, the more you’ll pay towards the interest. So if you can pay it faster, you’ll pay less.
The other option to rank your debts is according to the balance. Whatever debt has the smallest balance will be considered the priority. Now this option will not necessarily help you save money. But it will help motivate you. How? The small balance means you can completely pay it off in no time. When that happens, that’ll feel like a win for you. Use that to motivate yourself.
Compute how much you can afford to pay
Once you’ve ranked your debts, you’re getting closer to creating your debt payment plan. Now, it’s time for you to compute how much you can afford to pay each month.
Take a look at your budget plan. How much income comes in and how much is left after you’ve paid off your monthly expenses? Having a clear overview of how your money is spent each month is a great financial trait to have. It gives you the information you need to make decisions that’ll improve your financial position.
In this instance, it’ll give you an idea of how much you can afford when it comes to your debt payments. Whatever amount you get, take it and distribute it among all your debts. Pay the minimum amount requirement. If there’s anything left, put it all on the priority debt. That should pay it off faster.
If the funds are not enough, take a look at your expenses and see areas you can cut back on. If it’s not enough, then find a way to earn more.
Set a timeline for each debt
The last step to creating an effective debt payment plan is to set a timeline for each debt. Why is this necessary? Because it’ll make you feel more accountable for your payments. When you give yourself a deadline, there’s a sense of urgency that’ll keep you in line. No matter what happens, you’ll find a way to meet your monthly payments.
This is the feature that’ll make your repayment plan effective. If there’s a sense of accountability, the need to complete the plan is there. Once you complete the plan – that’s when you can consider yourself debt-free.
Why a debt payment plan is important
Having a debt payment plan is really the best way to deal with your credit problems. A survey revealed that almost half of their respondents got out of debt because they followed a plan. If you want to achieve the same success, then you need this plan.
Apart from that, there are other reasons why you need to take the time to create this repayment plan.
Keeps you organized
If you notice, the steps that it took to create the debt payment plan forced you to look at your debts and finances. You need to organize everything so you can determine the best way for you to pay off what you owe. This is a chance for you to organize your finances – making it easier for you to do the next benefit.
Help you control your finances
When you have your debts and finances organized, you can easily get the information you need. This allows you to determine your current status. If you know where you financially stand, you have better control over it. That should make things easier for you to make smart decisions about your finances.
Motivate you to pay debts
With the knowledge that you have about your financial situation, you can find the motivation to pay off your debts. The debt payment plan will show you the progress you’ve made. It’ll encourage you and keep you moving forward until every single debt that you have is paid off.