Greetings, Wise Dollar friends! If you’ve been following along with our monthly series on how to get out of debt, you’ll know that we started with a post on the importance of having the right attitude regarding your journey to debt free. We followed that up last month with a post on assessing your financial situation. At this point, you should have a good idea about what your debt and asset situation is, and a clear understand of what kind of mindset you’ll need in order to make your journey to being debt free successful.
Today, we’re going to talk about the importance of formulating a plan for getting out of debt. Yep, here’s where the fun work begins. No sarcasm here; getting out of debt truly can be fun. Once you formulate your plan and start seeing those debt numbers go down, you will indeed be having more fun than a day at a Disney theme park could ever bring you. 🙂
Get Out of Debt – Your Plan, Your Way
One quick Internet search and it becomes crystal clear: there are many, many ways to pay off debt. This is why customization of your get out of debt plan is so vitally important. Only you know what makes you motivated to keep striving for a goal and what causes you to want to give up.
For instance, two popular methods of debt repayment are the Debt Snowball and the Debt Avalanche. The Debt Snowball works by paying off your debts in order from smallest to largest. Financially, the snowball is not usually the best way to go, but emotionally, seeing those debts crossed off the “I owe” list faster brings huge emotional wins, which often encourages a person to keep on that journey to debt freedom.
The Debt Avalanche requires that you pay off the highest interest loans first. On paper, you’ll still see the same list of debts you’ve always seen, but the numbers will be getting smaller. From a purely mathematical standpoint, getting rid of the highest interest loans first will allow you to become debt free quicker – provided you can avoid discouragement from not seeing those debts crossed off quicker like you do with the snowball method.
The take-away here is that you need to discover a plan that will allow you to be the most successful in your debt payoff journey, and customize it to your specific income, payment and debt situation. Once you discover that plan, feel free to modify it when necessary based on changes in your financial situation as well. Regularly assessing what works and what doesn’t is key to taking your debt payoff plan through to the finish line.
Your “Get Out of Debt” Budget
Spend tracking and budgeting are crucial to your debt payoff plan. Those two steps will help you to find all extra money possible to put toward debt repayment. So, the first thing you need to do in this process is to commit to tracking all spending. This will help you to discover any financial leaks that might be punching a hole in your plan to become debt free. Second, you need to make a……budget.
Don’t panic: although budgets often conjure up images of balls and chains, I’m here to change your views on budgeting. You see, what budgeting, and spend tracking, truly offer you is FREEDOM.
By giving you a crystal clear picture of your spending habits, and allowing you to then make future spending decisions based on what means the most to you. With budgeting and spend tracking, you can see that you’ve been spending a lot more than you thought at happy hour, and you can take that $500 a month you’ve been spending on happy hour and put it towards that home you’d like to purchase. Or that trip to Australia. Or that early retirement fund.
Budgeting and spend tracking, as a part of a complete debt payoff plan, allows you to manage your money in a way that ensures you are spending it on the things that mean the most to you.
So, when you make your budget, the plan is to make a line item for every bill you owe each month, for any savings funds, and then put extra toward debt. This is called a zero-sum budget. A zero-sum budget ensure each dollar that comes into your account has a place and a purpose, like this:
Joe’s Monthly Income: $3,000
Mortgage pmt: $1,000
Pet Costs: $30
Home repairs: $40
Visa minimum: $210
Mastercard min.: $175
Student loan min.: $85
Emergency fund: $50
Total needed each month: $2,525
Okay, so our fictitious consumer, Joe, has an income of $3,000 a month and monthly expenses totaling $2,525 a month. This leaves an extra $475 floating around in Joe’s budget. In a zero-sum budget world, Joe would take every dime of this $475 and put it toward his debt in the manner he’s deemed most efficient for his personal and emotional needs. That extra $475 a month will allow Joe to put an extra $5,700 a year toward his debt, not including the massive amounts of interest he’ll save in the process.
By having a plan, a personalized plan, Joe will be able to knock out his debt much, much quicker than he would have by simply making the minimum payments. And this fast track to debt free was all made possible by a simple budgeting and spend tracking plan that was customized to fit Joe’s specific personality and situation.
Do you have a budget and spend tracking system in place for your money? If so, how has it worked for you? When you’ve paid off debt, do you attack the lowest balance or highest interest rate first?
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