Making a Plan to Manage Your Debt

In today’s world, the idea of debt has become an unavoidable reality for many. Whether it’s from credit cards, student loans, or mortgages, the burden of debt can be heavy. But, with a strategic approach, you can manage your debt effectively. This guide will take you through the process of Making a Plan to Manage Your Debt.

By following a few simple steps you can get your debt under control, save money and get back on track!

Making a plan to Manage debt Step by Step:

1. Identifying Your Debt

The first step in managing your debt is understanding what you owe. Jot down all your debts in a systematic manner.

Here’s what you should note for each:

  • The total amount you owe
  • The minimum monthly payment
  • The interest rate

Your list could include the following:

  • Mortgages
  • Auto loans
  • Credit cards
  • Lines of credit
  • Personal loans
  • Educational loans
  • Instant cash loans
  • Outstanding taxes
  • Deferred payment plans
  • Unsettled utility bills (mobile, power, television, etc.)
  • Borrowings from acquaintances and relatives
  • Alimony or child support you owe
  • Any other unpaid bill (property taxes, retail financing, etc.)

For better management of your debts and savings goals, you can use financial goal calculators available online.

2. Revising Your Budget

A budget is a financial blueprint that aids in managing your money. It helps you:

  • Understand your income, expenditure, and savings
  • Balance your earnings with your expenses
  • Direct your spending to achieve your financial goals

By revising your budget, you can pay off your debt quicker. Prioritize necessities over luxuries and consider cutting down unnecessary expenses. Thus, you’ll have more funds available to repay your debts. Online budget planners can be a great tool for managing your money and enhancing your financial status.

3. Designing a Strategy to Manage Debts

After listing all your current debts, begin formulating your plan to pay them off. The nature of your debt and the amount you owe will impact your repayment strategy.

3.1 Choosing a Timeframe

Establish a payment timeframe that is practical and affordable. If your timeframe is too extended, you may lose motivation due to lack of progress and end up paying more in interest over time. Conversely, if your timeframe is too short, you may struggle to keep up with your payments and feel discouraged. Remember, if interest rates increase, your monthly payments may also rise. There are resources available online to manage your money when interest rates increase.

3.2 Deciding Which Debts to Pay off First

Depending on the type of debts you owe, it might be best to pay off certain debts first.

High-Interest Debts

By clearing the debts with the highest interest first, you’ll end up paying less interest overall, thus becoming debt-free sooner. Organize your debts from the highest to the lowest interest rate. Make the minimum payments on all your debts, then use any extra money to repay the debt with the highest interest rate. For example, immediate cash loans and credit cards usually have the highest interest rates.

Lowest Balance Debts

Starting with your debt with the lowest balance can be easier. You’ll feel the satisfaction of paying off a debt sooner, keeping you motivated to achieve your goal of becoming debt-free. However, this option may cost you more over time, especially if you have one or multiple debts with high interest rates.

3.3 Plan to Repay Family or Friends

If you owe money to family or friends, discuss the repayment plan with them. Commit to a payment schedule that works for both parties. Consider writing post-dated checks or setting up automatic transfers to adhere to the payment plan, demonstrating your commitment to repay them.

3.4 Work Directly with Your Creditors and Financial Institution

Discuss your financial situation with your creditors. They may offer you:

  • A lower interest rate on your debt
  • An extension on your payments over a longer period to reduce your minimum monthly payment
  • A consolidation of your debts into one loan

3.5 Closing Accounts After Paying Off Debts

After paying off a debt, consider closing that account. Retain only what you need and can manage responsibly. However, keep an old account open as your credit score is partly based on how long you’ve had credit, known as your credit history. Keeping an older credit account open helps maintain a long-term credit history.

3.6 Consider a Secured Credit Card

You might want to consider using a secured credit card instead of a regular one. A secured credit card requires you to deposit money with the card issuer as a guarantee, and you can only spend up to that limit.

4. Consolidating your Debts

You might want to consider applying for a loan to pay off multiple high-interest debts, known as consolidating your debts. This means you’ll only have to make one monthly payment instead of paying each debt individually.

A consolidation loan can help you get out of debt if:

  • It has a lower interest rate than the debts you are consolidating
  • It has a lower monthly payment than all your other debts combined. This way, you can put the extra money towards paying down your debt faster
  • You avoid taking on more debt while you’re paying the loan

If you’re considering a consolidation loan, ask your financial institution which debts you’ll be able to consolidate.

Eligibility for a Consolidation Loan

Financial institutions may offer you a consolidation loan depending on your situation. To be eligible, you must have a good credit score and a sufficient income to make the monthly payments.

Shopping Around for a Consolidation Loan

Some companies offer consolidation loans with interest rates higher than the debts you’re trying to consolidate. Shop around to find the best rate and weigh your options. Applying for loans with different lenders within a short time span may lower your credit score. Financial institutions may offer different interest rates depending on the type of product you choose. Shopping around could help you find the best loan for your budget.

5. Avoid Accumulating More Debt

Making a plan to manage your debt involves avoiding future debt as well.

If your expenditure exceeds your income, it will be challenging to become debt-free. If you’re considering borrowing more money, understand how it would impact:

You’re at risk of losing control of your debt if:

  • You’re already struggling to make your debt payments
  • You’re close to your credit limit
  • You would struggle to make higher payments if interest rates increased

Tips to Avoid Accumulating More Debt

Follow these tips to minimize the chances of accumulating more debt.

Save for Your Financial Goals

By saving for your financial goals, such as your child’s education, a new car, or a down payment on a house, you can avoid taking on more debt.

Saving a little every day can go a long way. Some examples of how you can save money include:

  • Using public transportation instead of driving your car and paying for parking
  • Bringing your lunch to work instead of eating out
  • Making your coffee at home instead of going to a coffee shop

Use Your Credit Card Responsibly

Ensure that your credit card spending fits within your budget. If you don’t use your card wisely, you may accumulate more debt. To avoid getting into more debt, use cash or debit instead of your credit card. This way, you’ll avoid spending money you don’t have. Also, stop using your credit card until you’ve reached your debt repayment goal.

Avoid “Buy Now, Pay Later” Plans

Many companies now offer buy now, pay later plans for the purchase of products and services. With this type of plan, you are financing your purchase with credit. Buy now, pay later plans could encourage you to spend beyond your means. Always pay your balance in full by the due date to avoid additional fees and high interest rates.

Reduce Your Banking Fees

Use ATMs from your own financial institution and review your banking package to understand how many transactions are included.

Look for Ways to Increase Your Income

Consider selling some of your assets or taking on more work to make extra money to put towards your debt.

Rebuild Your Credit

Accumulating debt may harm your credit score. A poor credit score can affect more than your ability to borrow. For example, many employers require a good credit score to hire you. Landlords may also run a credit check before accepting you as a tenant.

You can improve your credit score by:

  • Ensuring you make payments on time and in full
  • Not using all the credit that is available to you
  • Not applying for new credit if you don’t need it

6. Know Where to Get Help

If you’re trying to pay down debt and need help, don’t wait too long. Be proactive and seek help before experiencing challenges.

You can contact:

  • An accredited non-profit credit counselor
  • A financial advisor
  • A Licensed Insolvency Trustee

With their help, you’ll be able to:

  • Evaluate your current debt situation
  • Determine your current and future needs
  • Make a budget
  • Find ways to pay off the debt

Before signing up for services to help pay off your debt, explore your options and compare the different services offered.

In conclusion, making a plan to manage your debt is a journey that requires discipline, commitment, and strategic planning. It may not be easy, but it’s worth it. Start today, and take control of your financial future.

Find Your Personal Debt Relief Solution

Licensed Insolvency Trustees are here to help. Get a free assessment of your options.

Discuss options to get out of debt with a trained & licensed debt relief professional.