For people with substantial debt, it’s easy become overwhelmed when confronted with how much money they actually owe, especially if they live on a limited income It can seem impossible to work your budget in a manner that allows you to pay all of your current expenses, settle debts, and save money for emergency situations.
However, where there is a will there’s a way, and you can create a debt payoff plan, regardless of your current situation by understanding exactly how to structure your debt payment plan and lifestyle budget.
The following five steps are designed to help you create a debt payoff plan that works for you.
Rank Your Debts
The first step to take towards financial freedom is to determine exactly what debts you currently owe.
In order to do so, create a list of all the people and places who you owe by checking all of your records. It is important to list every debt that you have, as neglecting debt can lead to a hit on your credit score.
After making a list of all debts that you currently have, it is time to find out exactly how much you owe on each debt. In many instances, doing so requires getting into contact with the creditor and receiving a precise number as to how much you owe. It is also important to verify the estimation for honesty based on the interest rate established in the contract and the amount that you have previously paid on the debt.
After determining how much you owe each creditor, rank your debts from most important to least important. In most cases, it is best to rank the lowest debts first and work your way up, eliminating debts one by one as you go.
After you rank your debts, it is time to negotiate your debts.
Many debtors fear to negotiate with creditors out of fear that they will be unreasonable and simply want their money as soon as possible. While it is true most creditors do want you to pay the debt off as soon as possible, they understand that many people struggle to do so, which gives you some leverage in the situation, as they may be willing to accept lower interest rates or even a settlement payment in order to get you to pay.
When contacting creditors, try and work out the lowest interest rates possible. In some cases, you may be able to settle the debt outright for a much lower price than originally agreed upon. However, settling your debt may require a large sum of money being paid at once, which means it may only be an option if you have money saved up.
Organize Your Budget
At this point, you should fully understand your debt situation, including who you owe, how much you owe, and the interest rates for each debt.
Before establishing a debt payoff plan, it is important to ensure you have your necessary expenses covered, such as rent, car payments, etc. The best way to organize your budget is to list all of your expenses you have each month, whether it is necessary or unnecessary. In some cases, going through a month documenting all of your expenses is a great way to gain a full understanding of where your money goes.
After creating a list of all expenses, determine which are necessary and eliminate or greatly reduce all unnecessary expenses.
After determining your expenses, you need to find out exactly how much your monthly income is, and seek additional income opportunities if you are short of meeting your mandatory expenses. While it may seem challenging, many are able to find additional income doing something they love. For example, you could consider officiating sports games, working at a bookstore, or consulting in an area in which you are skilled or knowledgeable.
Create a Payment Plan
Ideally, you should have enough monthly income to cover your expenses and still have some money left over for debt payments and savings. In the event you do not have enough income monthly to cover your expenses, you may need to continue to cut expenses or continue seeking consistent income opportunities outside of your main line of work.
After finalizing your budget and creating a surplus of monthly income, it is finally time to create a debt payoff plan. First and foremost, it is important to stay organized and make a plan with a debt payoff planner. The most recommended way to pay off debt is to pay the minimum amount possible on all debts, except for the one with the lowest amount, which you should try and pay off as soon as possible. Once a debt is fully paid off, move on to the next debt and eliminate one debt at a time.
As previously discussed, try and negotiate the lowest interest rates possible with all creditors, and settle as many debts beforehand as possible.
Save Money When Possible
It may seem difficult to save money when paying off debt and covering all monthly expenses. However, it is very important to create an emergency fund. The fact of the matter is things happen in life, and an unexpected injury or car repair is enough to derail your entire budget and debt payoff plan, leaving you feeling hopeless and trapped in an unfriendly financial situation.
Therefore, the best way to handle saving money is to treat it as another expense. Do everything in your power to save money each month, even if it means temporarily cutting expenses or finding additional income opportunities.
Even the smallest savings can help protect against the unforeseen. Simply saving a hundred dollars each month is enough to create a significant buffer that covers you in the event an emergency occurs.
The most important part of a debt payoff plan is actually sticking to it. The best debt payoff plan is useless if it is not properly executed. Therefore, be sure to stay consistent and stick to the budget. The long-term financial freedom is worth the temporary sacrifices you may have to make.