Step #1: Get Your Budget In Order
To get out of debt, you first need to take a good look at your budget. You do this before you develop a debt repayment plan for two reasons:
- There needs to be a spending plan in place to avoid using credit
- It allows you to find extra room in your budget to put toward debt
Your goal is make sure your needs are met and find ways to free up income so that you’re able to spend more on debt repayment.
Step #2: Stop Creating More Debt
This is why building a budget is a critical first step. Though it might be challenging, you’ll need to stick to your plan to avoid using credit. To help you stay the course, identify spending triggers and barriers to success.
Step #3: Make Your List
To develop your get-out-of-debt plan, you need to know where you stand with your debt. This requires gathering the details and putting together a list of everything you owe.
Step #4: Make Your Plan & Set Goals
As you develop your plan, you’ll need to consider how much extra money you can afford to put towards your debt each month (above the minimum payments). Again, you’ll do this by reviewing your budget and finding ways to trim it so that you have extra money to put towards your debt.
Next comes the planning. In some cases, it’s beneficial to consider a multistep approach. For example, you might refinance your loans or consolidate your revolving debt before moving forward with the stack or snowball methods. Evaluate each option and pick the ones that work best for you.
Refinancing involves replacing an existing loan with a new loan, ideally with a lower interest rate and/or lower monthly payment. While this isn’t a payment plan, refinancing debt can be a good strategy if you have debt with high interest rates.
When you consolidate, you take out one larger loan and use that loan to pay off multiple smaller loans. Instead of having numerous minimum payments to make, you’ll have one. In addition to reducing your monthly payments, it’s possible to reduce the interest and the time needed to pay off.
Once you’ve picked your debt repayment strategy, set goals for yourself. When will you aim to pay your first debt off? When will you aim to pay 50% of your debt off? What will paying off your debt enable you to do? Think about what means the most to you and include those goals in your plan.
Step #5: Put In The Work
You have your budget, list, and plan. Now, you’ll have to put in the work to reach your goals.
- Know and recognize triggers
- Display your plan where you’ll see it every day – phone, refrigerator, desk, etc.
- Review your budget regularly and make changes as needed
- Continually look for ways to reduce expenses or increase income
- Dedicate windfalls (tax refunds, bonuses, etc.) to paying the debt you’re currently tackling
- Find someone to help hold you accountable
- Celebrate milestones