Earlier this month we wrote about how to create a budget. But a common question we’ve gotten is how do you create a budget when you feel like most of your money is going to paying off debt? And we agree! It’s hard to create and stick to a budget when you realize that a good portion of your paycheck goes to paying loans and credit cards.
According to the American Association of University Women, women hold nearly two-thirds of outstanding loans. This can be attributed to several things, including the gender pay gap, lack of financial education and, even more recently, the unemployment crisis due to COVID-19. How can we take back control of our debt in a time of uncertainty? We have 8 steps and tips to help you create a debt repayment plan and build your confidence in money.
Review Your Money
The first step to finding confidence with your debt, is to review your spending and create a budget. You need to track what you’re bringing in, what you’re spending, including minimum payments on your debts. This is the start of your debt repayment plan.
Once you’ve figured out your budget and what you have left over, you should figure out what, if any, that you can pay extra on your debts. This reviewing and budgeting is important because it also lets you start building your money confidence overall.
Pick a Debt Payment Plan
There are several different types of debt payment methods. We’re going to review three different methods.
- Snowball Method
- This method involves listing your debts from smallest amount due to largest amount due. As you pay off a smaller debt, you take that money and pay it towards the next debt on the list. People like this method because it allows you to have small debt payment wins more frequently. This makes dealing with debt easier for some people.
- Avalanche Method
- The Avalanche Method is much like the Snowball Method, except instead of listing by amount due, you list your debts from the highest interest to the lowest interest rate. This method is good because you will save more money in interest in the long run.
- Debt Consolidation
- This method involves taking out a loan with a low interest rate to pay off your other debts. This method can be helpful if you have many debts with high interest rates or to put all your debt into one easy monthly payment.
Adjust Your Savings Goals
“Do I save money, or do I pay off my debt?” In an ideal world, you would be able to do both, but we don’t always live in the ideal world. It is perfectly acceptable to adjust your savings goals to better fit your current financial needs and to work with your debt repayment plan.
Budget planner Raya Reaves suggests “When thinking about if you should save and pay off debt, it all comes down to what you can afford. If you can’t afford an emergency, then you absolutely should save. If you have savings already, then you can’t afford the interest on your debt and should focus your efforts there.”
Negotiate with Your Bank
It’s not uncommon that banks will work with you in lowering your interest rate or minimum payment due if you call them. This is especially true now in the time of COVID-19. If you find yourself struggling to pay off your loan or credit card, give your bank a call and explain your situation. While this is not guaranteed to work, it never hurts to ask.
Build an Emergency Fund
When creating your debt repayment plan, it can be a good idea to put money to the side for emergencies. This can stop you from having to use a credit card or take out a loan if something big comes up. Even putting aside $10-$20 a month can offset how much you need to put onto a credit card.
Remember, It’s a Marathon, Not a Sprint
We all want our debt to go away as soon as possible. Debt-free living is what most of us are working towards. However, trying to pay off your debt with a “sprint” mentality can create debt fatigue. Pouring all your extra money into paying off debts can leave you feeling drained and empty. Only you know what is best for you, but we suggest creating a debt payment plan that also allows you to enjoy your life.
Forgive Yourself if Your Plan Fails
Life happens. While we would all love for smooth money sailing, you never know when something like a surprise medical bill or car repair will pop up. If you find that you must use your credit card, or you can’t pay extra money towards your debt, don’t panic. Review your plan and see what you can do to get back on track the next month.
Remember that becoming debt-free is a journey. There is no “right” way for every person to follow and you have unique circumstances. Be kind to yourself as you develop confidence and create your plan.