Creating a debt payment plan is a necessity if you truly
want to get out of debt. And even if you
a debt reduction option that involves working with a debt relief
company, you will still need a plan. In fact, the worst thing you can
do is to assume that someone
or some company will solve all of your debt problems for you.
It just won't happen. You
have to be the driving force in any debt relief plan.
Now, a debt repayment plan involves two basic things.
Your budget will tell you how much you can put towards paying down your debts each month, while your repayment schedule will show you when and how much to put towards each debt.
Everyone should have a budget. Not just people who are in debt. Of course, if you are in debt, a budget will become the foundation of your debt payment plan. Without one, you are doomed.
Don't know where to start?
Putting together a budget is not really a difficult thing to do. It takes a bit of work and organization but it is not a complicated document. The goal of your budget will be to enable you to clearly identify your spending habits (and modify them where necessary) in order to free up as much money as possible to put towards your debt payment plan each month. Once your budget is complete, you will know (to the penny) how much of your income can go towards debt repayment each month.
Once you have your budget in place, and hence know exactly how much money you will have each month to put towards paying off your debts, it's time to prepare a debt repayment schedule. This schedule will lay out in detail exactly how much to pay towards each of your debts each month, and will clearly show you when those debts will be paid off.
It doesn't matter which debt relief plan you choose to use (the debt snowball method, a debt consolidation loan, debt settlement, credit counseling or even Chapter 13 bankruptcy), without a budget and a repayment schedule, you will get nowhere. Let's look at a quick example of this process using the debt snowball method of debt repayment.
Start by gathering all of your financial documents. Your pay stubs, mortgage information, credit card bills, utility bills, car loan info, etc. Gather everything that you can think of that pertains to money coming into or out of your life. Some things you may have to estimate in the beginning like your grocery expense, gas expense, clothing expense etc. Over the next 6 to 8 weeks however, you should track to the penny how much you spend on any of these types of items.
For now, just list you income sources first and then all of your
expenses. Add up both and see where you stand.
If your expenses are more than your income on a monthly basis (before you even make your debt payments) you need to take some serious action. Otherwise, focus on trimming your expenses where possible in order to free up as much money each month to put towards your debts.
debt relief strategy.
Once you have a clearer
understanding of your financial situation and have prepared a budget,
choosing the best debt relief strategy to fit your situation will
become much easier. If you need help with this step, I recommend that
you speak with a credit counselor. Not only can a certified credit
counselor help you choose a debt relief strategy, they can help you
analyze your finances and prepare a thorough budget as well. So if you
are "stuck" on step #1, a credit or debt counselor can help you at that
stage as well. Here is a good credit counseling company that I
Alternatively, you can view this article on your
options for getting out of debt to help you decide.
For the purposes of our example, we are going to choose the "do-it-yourself" debt snowball method.
No matter what type of debt
reduction method you are using, you need to write down exactly
what your debt repayment schedule will be. Remember, this schedule will
likely last for many years, so be prepared to have a lengthy schedule.
Sidebar: Failing to take this step is a mistake many people make, especially people who choose a debt consolidation loan as a method of reducing their debts. They run out and get a new loan in order to reduce their monthly payments and interest, but fail to hold themselves accountable to aggressively paying down that new debt by writing out a repayment schedule and sticking to it. As a result, many of these people end up in worse financial shape than they were before. Alright, back to our debt snowball example...
The debt snowball method is all about focus, emotion and momentum. You "focus" your efforts on one of your debts (the one with the smallest balance), pay it off as fast as you can (which makes you feel good and helps you stay motivated, the "emotion"), and then you focus on the next debt and pay it off as fast as you can (the "momentum" or "snowball" grows as you pay off each debt).
Preparing a debt payment plan for the debt snowball method is quite
simple, which is one of the reasons it is also so powerful. Take out a
piece of paper and list your debts starting with the debt with the
smallest balance and moving all the way down to the debt with the
highest balance (likely your mortgage if you have one). For all of your
debts except the first one on the list you will pay the
absolute minimum amount possible each month in order to keep them
current. For the first debt on the list you will pay as much as
possible each month towards this debt until it is paid in full.
Celebrate, and repeat with the next debt on the list.
Of course each time you pay off a debt, you can apply the money that you were using to pay it off to the next debt on the list. The amount you are applying each month to the "top" debt grows like a snowball rolling down a hill. It gets bigger and bigger and your debts are paid off faster and faster.
This is just one example of how a debt payment plan can work. But as I said earlier, regardless of the debt reduction method you choose, its success will be based on your ability to create a thorough budget and repayment plan and stick to it. And if you need help with this important step, speak to a credit counselor in your neighborhood or find one online if that is more convenient for you. The reliable ones offer much of these services for free.