How to Develop a Debt Payoff Plan

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How to Develop a Debt Payoff Plan

Staff Writer · Feb 18, 2010

Creating a debt payoff plan is necessary to finally rid yourself of pesky, stressful debt. While everyone has debt and some debt is better than others, reducing or eliminating your debt will increase your credit score, enable you to receive better loan interest rates and rid your mind of its worries about money. Paying off debt is not accomplished easily or without forethought.

Inventory Current Expenses

The first step in creating a debt payoff plan is to make a register of your current expenses and income. Your income includes paychecks, dividend payments, rents from any rental properties, and other regularly schedule income from investments or work. If you receive unscheduled income, such as a paycheck from sporadic work, these should also be included in income, but under a separate column as they are irregular and unreliable sources of income. In another list or column, itemize your current debts and obligations. Include rents or mortgage payments, utility bills, student or other type of loan payments, support obligations and credit card bills. Unlike your income, irregular or periodic bills should be included in this section as your responsibility for them is not eliminated in the months they are not to be paid.

Be thorough and realistic in your lists. Next to each item list the amount of payment and the expected date of receipt of income or the due date for bills. Calculate your total income and total debts and compare the two columns, writing down the difference, if any, between the two columns. Take time making this list. Planning to and paying off your debt cannot occur overnight.

Think seriously about whether your income is large enough to cover your expenses or debts.

Analyze the Inventory

Once you feel your list is complete, investigate your financial obligations. Check to see if you have unnecessary or wasteful spending and what you spend the majority of your income on. Next, identify, mark and add together those debts that are unavoidable or carry high interest rates. Finally, ascertain and add together those obligations that are smaller or less pressing. It may be helpful to mark these items using a highlighter to make it easier for you to create a payoff schedule.

Create a Realistic Schedule

After marking your expenses according to immediacy and amount, check their due dates. Compare these dates against the dates you receive your salary and other income. This will help you identify which paycheck will need to be used to pay specific debts. For example, if you are paid twice a month and have a bill due on the 12th of the month, that bill must be paid using the paycheck you receive on the 30th. While your goal should be to make a monthly debt payoff schedule, this knowledge will help you understand where to begin and any potential limitations you may face in creating your plan. It may be helpful to write the due dates for your debts and the dates you receive your salary in a calendar.

After carefully reviewing and analyzing your income and expenses, it is time to make a budget. The most important thing in forming a budget is to be realistic about what you are willing to go without or change in your lifestyle. You might be able to cut back on eating out, trips to the movies, and shopping for non-necessities. After paying all of your required debts and living expenses, it is time to identify and dedicate any surplus to the most pressing debts. This, of course, is the most difficult part of making a debt payoff plan.

It is advisable to first pay off any smaller debts. Eliminating these will free up more funds to pay off larger debts in the future. Of course, all debts must be paid on time and kept current. If you have overdue bills, it may be time to contact the institution to check into the possibility of changing the payoff terms so you can remain current on the obligation. Mark in your calendar on the dates these smaller debts are due how much you will pay towards them each month. Any amount paid over the amount due for that month will be credited to the debt’s principle, which will reduce the length of time and the amount of interest you pay.

Once the schedule for the smaller debts is paid off, the next task is for you to turn to the larger obligations, planning their reduction and elimination with the same pattern as you did the smaller ones. Obviously, a ten thousand dollar debt will take significantly longer to repay than a thousand dollar bill, and so do not be afraid or discouraged by the length of time and distance into the future you are scheduling your repayments. Once again, any payments above the one stated in the bill will be applied to the principle.

The most important part of making your debt payoff schedule is to be realistic in setting your goals. Do not commit yourself to paying more than you are able to afford or faster than you are able to make the payments. Stick to the budget, while it may seem hard to say no to going out or making certain expenditures, you may be surprised by how many people follow your example or at the very least express their respect for your dedication. The best part of creating a debt payoff schedule, though, is finding your happiness increasing as your debt decreases.

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