Once you’ve collected all of the information about your existing debt, it’s time to make a plan and put it into practice.
Make a Plan
Before you start working on a repayment plan, it’s important that you understand the big picture. There are two main strategies that can help you pay off your debts: debt avalanche and debt snowball.
One of the most common strategies that people use to pay off their debts is the debt snowball. Debt snowball involves paying off the smallest amount of debt first while maintaining the minimum monthly payments on other debts. This method works by taking the money that was used to pay off the smallest debt and using it to pay the next smallest one. Although it might not be as fast as debt avalanche, debt snowballing can be very motivating as you may be able to knock out several debts quickly at the beginning.
Another strategy that people use is debt avalanche. This method pays off the highest interest rate first while maintaining the minimum monthly payments on other debts. After that, consumers focus on the next highest interest rate and repeat the process until all of their debts are paid off.
Deciding on the right strategy can be a personal matter. For instance, according to Woroch, a debt avalanche is a more effective method for paying off your debts faster. However, it’s also important to approach this strategy on a case-by-case basis. A study conducted by Northwestern University revealed that people who tackled their small balances first were more likely to get rid of their overall debt.
One of the most important factors that you should consider when it comes to developing a debt repayment plan is your motivation and strengths. Even if the plan that you have is different from another person’s, as long as you can consistently pay off your debts, you’re still golden.
Before you start working on a repayment plan, it’s important that you first create a budget. This will help you prioritize your payments and ensure you make the minimum monthly payments.
Paying off debts should be a top priority since it can prevent you from achieving other goals such as having a family or career change.
Step number one is to reduce your spending. This will help you save money for future payments. Having a budget can also help you establish a plan for paying off your debts by cutting spending from some nonessential areas to funnel into debt payments. Budgeting takes discipline, but it’s worth it, in the long run, to be debt-free.
If you’re still having a hard time sticking to the plan, make a point of celebrating your debt repayment victories. Set certain milestones and plan something fun to look forward to–maybe a larger purchase you’ve been putting off until you have a little more financial freedom or a nice dinner out as a family.
For instance, if you have a larger debt repayment goal, set small goals that you can easily reach. If you have a larger goal, then incorporate these small celebrations into your plan. As you reach this goal, then you can start to celebrate.
Before you start celebrating, make a plan and write down all of the important milestones in your plan. Having these goals will help you focus on a positive and fun goal. For instance, instead of planning on paying off $500, you can actually enjoy a night out with your friends after reaching a certain achievement.