Are you ready to tackle your debt like a pro? These eight quick and easy steps to manage your debt are designed to be simple to implement and you can get started right away.
Paying off debt can often feel like a puzzle, especially when there are many different types of debt we may deal with. With the right strategies and a bit of discipline, you can take control of your financial situation and pave the way to a debt-free future. In this article, we’ll cover eight quick and easy steps to manage your debts.
It’s time to get comfortable, remove any distractions, and get started!
Step 1. Understand your debt
To manage personal debt effectively, start by understanding what you owe. This could include student loans, credit card debt, a car loan, or a mortgage.
List each debt that you need to pay in a table. This should at least include the name of the company that you owe money to, the type of debt, the amount of debt that you owe, the current interest rate and the minimum repayments.
Interest-free loans should also be included because they still require minimum repayments.
The table below shows an example of what the debt list would look like for an individual who has a mortgage, a car loan, a student loan, and a credit card.
Note: The debt values and minimum repayments in this table are examples only. Use your specific loan details for the debt list that you create.
If you are not sure about some of the details, you can contact the company or log in to your account. The information needed should be readily accessible.
| Company | Debt Type (term) | Current Debt (Amt owed) | Interest Rate (per year) | Minimum Repayment |
|---|---|---|---|---|
| XYZ Bank | Mortgage (30 years) | $380,000 | 5.7% | $2,210 per month |
| Rusty Cars R Us Finance | Car loan (5 years) | $16,800 | 8.2% | $345 per month |
| Smarts College | Student loan (variable) | $63,000 | 3.1% | $165 per month |
| Ripoff Credit Co | Credit card (monthly payment) | $1,900 | 23.6% | $1,900 (monthly balance) |
Step 2. Create a budget
Now that you have your debts listed, it’s time to start planning how to pay them off.
Effectively planning debt payments requires the help of a budget. Yes, the word that many people cringe at the thought of! This step is critical to managing debt and doesn’t need to be difficult.
In fact, we have an article on creating a budget that lays out, step by step, how to create a budget in simple terms.
The process of creating a budget involves listing down your income sources and expenses. Be sure to include the minimum debt payments that you listed in Step 1 above.
Once you have created a budget, you should have a clear picture of how much money you have left over for spending on fun things!
Step 3. Prioritize high-interest debt
Think of your debts as different plants in your garden. Some need more attention than others.
High-interest debts are like fast-growing weeds – they can quickly overtake your garden and become difficult to manage. Prioritize paying off debts with higher interest rates first. This will save you money in the long run.
You can do this by repeating Step 1 and creating a similar table, but this time ordering the debts from highest to lowest interest.
The debts listed in Table 1 above would then look like the following table, with debts ordered from highest interest rate to lowest.
| Company | Debt Type (term) | Current Debt (Amt owed) | Interest Rate (per year) | Minimum Repayment |
|---|---|---|---|---|
| Ripoff Credit Co | Credit card (monthly payment) | $21,900 | 23.6% | (monthly balance) |
| Rusty Cars R Us Finance | Car loan (5 years) | $16,800 | 8.2% | $345 per month |
| XYZ Bank | Mortgage (30 years) | $380,000 | 5.7% | $2,210 per month |
| Smarts College | Student loan (variable) | $63,000 | 3.1% | $165 per month |
Step 4. Snowball or avalanche? Choose your strategy
When dealing with multiple debts, you can choose between the snowball and avalanche methods.
Whichever method you choose, you should focus on paying the mimimum for each debt first. Then choose the strategy to pay extra money into the
The snowball approach involves paying off the smallest debt first, giving you a sense of accomplishment. In the example list of debts in Table 1 above, this would be the car loan debt of $16,800. You would need to pay the minimum amount into each debt, plus extra for the car loan.
The avalanche method targets the debt with the highest interest rate, saving you more money over time. In the example above, this would be the credit card debt of $21,900. You would need to pay the minimum amount into each debt, plus extra for the credit card debt.
Choose the strategy that aligns with your personality and financial goals!
Step 5. Negotiate better terms
Sometimes, you can renegotiate better terms with your creditors. This could involve lowering your interest rates or extending the repayment period.
Don’t be afraid to have a conversation about your financial situation. If you find you are struggling to keep up with debt repayments, it is better to discuss this with your bank sooner rather than later.
Step 6. Avoid adding new debt
While you’re working to pay off existing debts, avoid accumulating new ones. Focus on living within your means and finding creative ways to save money.
For example, bring your lunch to work, brew coffee at home, and shop during sales. By avoiding unnecessary expenses, you can stay on track and avoid taking unnecessary detours. With fewer expenses, this will help pay off debts sooner.
If you have a high credit card debt, try and avoid using credit cards until the debt is paid off.
Step 7. Build an emergency fund
An emergency fund is a crucial step in improving personal finance. Having an emergency fund provides protection when unexpected financial storms hit.
Aim to save three to six months’ worth of living expenses. This will prevent you from relying on credit cards or dipping into other savings or investments during emergencies.
Step 8. Seek professional help if needed
If your debts seem overwhelming, consider seeking professional help.
Financial advisors and credit counsellors can provide guidance and help you create a customized debt management plan.
Final thoughts
Managing personal debt is like taking care of a garden – it requires patience, attention, and the right tools.
By understanding your debts, creating a budget, prioritizing high-interest balances, and choosing a repayment strategy, you can take control of your financial future.
Remember, your journey to becoming debt-free is unique, and with determination and discipline, you can make significant progress. Following the steps outlined in this article will set you up and heading in the right direction to managing your debt like a pro!
If you have other experiences with managing your debt, share them by leaving a comment below.
