Making a debt repayment plan
Nobody wants to be hunted down by debt – or haunted by it, come to that. But the truth of the matter is that the general population seems to act in ways that cause it to happen.
You simply have to accept the fact that debt does not die a natural, painless death. It simply keeps on breathing, growing until it’s big enough that you can no longer hide it away in your drawer. It’s an awful secret to try to hide. The only real way you can deal with it is to pay it. Well, duh. You already knew that, didn’t you?
So how do you deal with it? You do it by making a debt repayment plan.
Very first thing to do is to list down all your debts.
Yes, all of them. Every last debt you have in the world. And I do mean every debt, including debts to family and friends, or debts that are “nearly finished.” Because nearly finished is not finished, is it?
Take the time to write down how much you owe and where.
Oh, here’s something to think about: list them them all, not just current debts, but those you think might have forgotten about you. Even if you haven’t heard from them for a while, you might be surprised at how they have their own way of finding you later and biting you when you least expect it. For a debt repayment plan to be successful, you need to include all of your debts.
So your list is completed, now it’s time to start ranking the debts on it. You really need to sit down on this one and analyze your situation. You will need to make a ranking order in which you are going to repay the debts. Check the due date, which ones need to be paid now and which can be deferred until next week or next month. You may want to prioritize debts which are accruing the biggest interest. There are people who want to repay debts base on the amount, it’s called the snowball effect, preferring to cancel out the smaller debts making their way to the bigger ones. Some people prefer to pay as much as they can of the bigger debts, reasoning that there is more interest to be saved that way. That’s cool, but only you know if you can keep on going like that without seeing the amount reduce all that much, month after month. Some people need to see the smaller debts disappear on a regular basis because it encourages them to keep going.
When you’re satisfied with your ranking, it’s now time to determine your budget. How much of your income is dedicated to repaying these debts. There’s no sense in dedicating a stupidly large amount for this purpose if it will interfere with your monthly obligations or expenses. That will only cause new debts when you are forced to borrow money again to get through the monthly obligations. Paying a large amount of debt is still possible even if you don’t have a lot of budget, you can always pay it in instalments to trim down the total amount.
You already know that it’s vital to create an emergency fund. We are in the business of paying debts, not making new ones. So, it’s really important that you set aside a portion of your money as ‘emergency fund.’ You can use this if ever (some would say when) the need arises while you are in the process of paying your debts.
Finally – at last ! – after all the listing and calculations, it’s now time to start paying your debt. You have the list, you have the rank, and you have the funds. Follow your listing and ranking – don’t be tempted to go off-course. That way, you’re much less likely to stray from your well-considered plan. You can make your goal and timetable you have set for yourself more likely to succeed.
Stay focused. Concentrate on the target debt you are paying. Follow your list. You have done the analyzing and thinking when you did the ranking, so there’s no sense spreading your budget in random fashion when you can actually concentrate on reducing – effectively killing – one debt at a time. Once you’re done with the first one, you can cross that out on your list and say to yourself that you’re one down and ready for the next one. It’s not only encouraging when you see that first debt topple, it’s also addictive. Many people report a feeling of a sense of freedom when they see the debt go. It no longer has its hooks into you. Make no mistake about it, debt is something that owns you, so the quicker you kill it the better you’ll feel.
While you’re doing all this, also do your best to save, save, save. You’ve got nothing to lose by saving. Any extra money you happen to have by chance, put it into your savings. It will be useful during financial emergencies, so you don’t need to get into borrowing again. Although you’ve made your plan to repay your debt as fast as you can, part of that plan is paying some debt to yourself. Think of it like this, you actually owe yourself and your family the money you need for an emergency fund – think of it as an actual debt to yourself. That means you’ll make some provisions for yourself (your emergency fund), even though you’ll be trying to kill your debt as much as you can. It’s important, essential, actually, to avoid putting yourself in the situation where you literally pay everything to debt. You have to leave yourself at least a little something for “living” and a little something toward your emergency fund.
Even after careful consideration to all these pointers, debt repayment plans are going to differ from one person to the next. Your repayment plan will depend on the nature of your debt and the amount of budget you have available to work on. You can and should create your own repayment plan that you think works best for you in your situation. Always remember to keep your focus and stick to the plan. Its success will eventually depend on your willingness to break free from all of your debts.
Willingness to break free from debt is something that is as much to do with mindset as it is money in your pocket, so we’ll tackle that issue another time. Watch out for our article on the right mindset to avoid debt!