How to Fine Tune Your Debt Repayment Plan
A strong debt repayment plan can help you choose which debts to pay down first and how to go about paying them in full. Grounded in a well-structured plan, you can face the future with confidence that you're making the right financial decisions no matter what comes your way.
Before you start creating your repayment plan, gather all of your recent monthly statements for each individual debt that you have — car payments, mortgage, credit card statements, and so on. Make note of remaining balances, interest rates, minimum monthly payments, and any extra payments you're making. Once you have all of these statements in place, you can start with the following steps.
Find Your Monthly Debt Expense and What Extra Payments You Can Afford
Calculate your monthly income and the total of your minimum debt payments. This is your monthly debt expense, the amount you need to pay to keep debts from rising or going into arrears.
Make sure your monthly debt expense is part of your budget, along with other important living expenses. Then, find your current disposable income, or the income left after paying all of your necessities. Calculate the amount that you can spare from your disposable income for extra debt payments. Whether that turns out to be $10, $100, or $1,000, every bit helps.
Identify Debts to Consolidate
One of the first decisions to make is whether or not to consolidate your debts. Debt consolidation is the act of taking out another loan at an interest rate that better aligns with your budget and goals in order to pay off old debts. It can also combine multiple debts into one easier payment.
This is particularly useful if you have several smaller debt balances with high-interest rates (such as credit card debt). Some consolidations are even part of a broader debt management plan that can help you get control over your finances.
Identify Debts to "Avalanche"
If you decide not to pursue debt consolidation or have other forms of debt that won't be covered, the next step is to look at which debts to avalanche. This term refers to using additional monthly payments to pay off your debt with the highest interest rates, and then move to the next highest interest rate. Because interest rates increase debt over time, the avalanche method is the best way to save money in the long term. It's an effective repayment method for credit card or loan debts that have highly unfavorable terms.
Identify Debts to "Snowball"
Your other option is to snowball debt payments or use additional payments to pay off your debt that has the lowest balance. This helps you get rid of individual debts quickly and is a good option if you have a lot of separate, smaller debts. You can then use the money saved by paying off an account to make even higher additional payments on your remaining debt.
Tips on Making Reliable Monthly Payments
An effective payment plan can help prevent accidents like missed payments.
- Set up Automated Services: Most accounts will allow you to make automatic monthly payments, ensuring that you're never late on a payment. Just be sure to look for any extra fees that automated payments may incur before signing up.
- Designate a Particular Payment Day: It's often smart to choose a particular day toward the end of the month and make this your debt day, where you review your budget and make all necessary payments.
- Revisit Your Plan at Least Once a Year: Some interest rates can change over time, as can your monthly income. Revisit your repayment plan to make sure everything is up to date.
If you have any additional questions about the right accounts to use for paying off your debts, schedule a meeting with your financial advisor.