Are you considering creating a debt elimination plan?
This can be a stressful task, so it is important that you are aware of the basic steps and some simple tips to make sure it works for you.
This article will assist you in creating an effective plan for paying off your debts and staying out of new ones!
Debt Elimination Plan – Form a List of Debts
First and foremost, make a list of all of the debts you are currently yet to pay off.
This may be an extremely daunting and overall stressful task, especially if you were trying to avoid your debts, but is necessary for beginning your journey towards a healthy financial future.
If you’re not sure of the amounts owed or even the amount of debt you have at the moment you may want to start searching through old financial records, which you hopefully will have stored somewhere easy to access!
If not, you may want to access a personal credit report. In order to make this list as effective as possible, try to include all details about your debts.
This includes how much the debt is, how much you are required to pay off each month, and the interest rate of the debt.
This can assist you in making an informed decision about the strategy you wish to use when paying off your debts and which method will save you the maximum amount of money possible.
Debt Elimination Plan – Look into Your Spending
The next step to creating your very own debt elimination plan, which caters to all of your needs, of course, is to take an active search into your spending habits.
It is wise to begin with the most important area of spending, the essentials.
The essentials, as the name suggests, are the payments you are required to make each month to continue to live in a functional manner.
You may want to split these payments into categories, such as:
- Electricity bills
- Water bills
- Transportation or Petrol
- Groceries
- Insurance
- Rent or Mortgage
- Insurance
Once you have identified your essential spending, you can then identify the amount of money you spend on them each month.
This can be found via previous payments or financial records.
Savings, although not technically required to function, are an essential category also as saving is a vital step towards both paying off debts and staying out of them in the long term, so it is wise to factor them in also.
You can then move on to the fun stuff such as clothing, dining out, or subscription services.
Once you have recognised the general amount you spend within a month, you can then make an informed decision regarding the next step of your debt elimination plan, budgeting.
Create a Budget
Now that you are aware of your spending habits, you can use the information to create a budget.
Budgeting can be a tedious task, but unfortunately, it is the best way to ensure your debt elimination plan is both effective and suits your lifestyle.
There is a variety of useful pre-established methods of budgeting you can use, such as the 50/30/20 method.
The 50/30/20 method is a form of budgeting that ensures it is tailored to your personal life and financial situation.
It involves splitting your spending into three categories and devoting a specific amount of your post-tax income to each. 50% of your income goes to needs, 30% goes to wants, and 20% goes to savings.
This can help you to have an easy-to-remember value on each of the main spending categories, creating a financial environment where you can pay off debts without over-extending yourself too harshly.
Remember to keep your budget realistic and make sure it works for you before 100% committing to a form of budgeting.
Make a Debt Elimination Plan for Paying Debts
With a budget in place, you can now move on to the most significant part of a debt elimination plan, eliminating the debts!
As with budgeting, there are a variety of established plans for paying off debt that are often used.
One of the most well-known debt elimination plans is the snowball technique.
Consider it like this. A small snowball begins rolling down a hill, progressively becoming larger and larger as it picks up more and more snow. Well, the snowball method mimics this.
Begin by devoting your extra finances to the smallest debt you currently have while still, of course, paying the minimum amount on all of your other debts.
Once you have completely paid off the smallest debt, move on to the second smallest. This plan is great for motivation and deems excellent results when done effectively.
The near opposite of this plan is referred to as the avalanche technique and devotes all extra income to the debt with the largest interest rate, progressively making its way down to the debt with the smallest interest rate.
Whichever strategy you select, make sure it fits into your life smoothly and still allows you to effectively live and enjoy your money!
Track Progress and Keep Motivated
So, your plan is in action. Congratulations!
Unfortunately, your job isn’t over yet. It is important to keep track of your progress and stay motivated to continue to see the effects of a debt elimination plan.
As you find yourself paying off your debts, it is a great idea to keep a, preferably visible, record of what you have paid off and what debts still need to be paid.
You may want to keep a whiteboard or list on your fridge so that you can cross debts off as you go.
Not only will this strategy keep you aware of the debts you still need to pay but will keep you motivated as you see the list progressively get smaller.
After all, who doesn’t love the feeling of physically crossing off a task you’ve been dreading off of your list?
Debt Elimination Plan – Key Takeaways
Creating a debt elimination plan can be really difficult.
You may not even know where to start and become quickly overwhelmed.
This is why it is so important to know the basics of creating a plan of this sort!
Always ensure your plan fits into your life and doesn’t take away from your enjoyment of your money or your ability to afford your necessities as this is a great way to become quickly unmotivated and give up.
Remember, one plan is not always going to apply to your life at the time as your finances will constantly change, so keep it as up to date as possible!
If you are really struggling to create a plan, there are financial advisors/councillors that can always assist you.