There is a lot of information out there about how to get out of debt. You can move money around to lower your interest rate, you can increase your income with a side hustle, you can decrease your spending by meal prepping or couponing, and so much more. You can organize by highest interest rate or lowest balance or even just whichever debt has the most emotional baggage. You can consolidate loans or talk to a credit counselor about lowering your interest rates, or even consider bankruptcy. There is so much to consider while you figure out what is right for you.
A debt repayment plan(DRP) isn’t a trademarked, specific formula. It’s simply the plan that you make to change your life. First you determine how much money you are able to apply to your DRP on a paycheck-to-paycheck basis. I call this your cashflow. That’s the money you can extract from your regular spending habits (dining out, entertainment, groceries, gas, etc.) to put toward your debts. You can calculate your cashflow for financial goals by building a budget.
There are a few different ways to determine your financial priorities, whether that is via highest interest rate, lowest balance, or worst emotional baggage. Once you determine your first priority, that’s where your cashflow goes, ON TOP of your minimum payment if you have one. You’ll apply your cashflow to your financial goals as soon as you have your paycheck in your hands, so that you can’t spend it on anything.
Debt Snowball
Organizing your DRP by lowest balance is Dave Ramsey’s classic Debt Snowball. This means you will pay your minimum payments on all debts, and every extra penny you get goes toward the smallest balance you have, whether that’s a credit card or money you owe your parents or anything. The snowball part comes when you pay off that first debt, now you can add that old minimum payment toward your next lowest debt. This plan works great because when you focus on lowest balance, that’s the easiest goal to actually reach and it provides a huge psychological reward.
Debt Avalanche
Another option is to organize by highest interest rate, this is commonly referred to as the Debt Avalanche. The premise is similar, except you apply every extra penny to your highest interest rate instead of your smallest balance, though they are often one and the same for people. Financially, you will save more money this way in the long run because you are paying less interest to the banks. I often find that the financial difference for most people is not that large between the debt snowball and the debt avalanche, both are highly effective strategies.
Debt with Emotional Baggage
The last option is to prioritize by which debts hurt you the most psychologically. Debt that carries emotional baggage would be like, debts associated with an ex significant other, or perhaps a loan from a friend or family member that causes strain on the relationship. These things cause a lot of anxiety and stress, even when the balance isn’t that high. Sometimes, choosing to pay these things off first will make it easier for you to focus on the rest of your financial goals in peace.
The best part about a debt repayment plan is that it takes all of the debating out of what to do with your money.
If you work a little overtime, or get a raise, or take up a side job on the weekends for a little extra money, you already know what your extra cash will go to. It’s always going to be applied to your priority one. This is the key to getting out of debt, you have to prioritize, and you have to keep yourself accountable.
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