Creating a Debt Repayment Plan: Tips for Taking on the Debt Yourself
In the credit friendly world we live in, it’s easy to be lured into the enjoy now, pay later mentality. Most of us have struggled with managing debt at varying amounts. And if not handled properly, debt quickly becomes a tiny snowball rolling down a hill, getting bigger and bigger, and eventually unmanageable.
Understanding why you’ve accumulated this debt is not today’s goal—it is to develop a plan for a debt-free future.
This blog will help you:
Get organized.
Define your debt reduction goals.
Explore your available options.
Begin to accomplish your goals.
Step 1: Develop a mindset of perseverance not procrastination
With debt, you always have at least three options: do nothing (which is not a real option), do it yourself, or seek outside help. Each of these options involves patience and perseverance.
Once you’ve taken that first step in deciding that you want to stop the credit snowball, the next step is the most demanding, you have to begin.
Beginning is often easier said than done. Procrastination prevents us from doing two KEY things:
Ending a troubling habit, and
Beginning a productive one.
The only payoff for procrastinating is that you protect yourself from the possibility of failing. You’re happy because you’ve convinced yourself that you can do it, but you'll face it another day. You’ll start that diet or exercise program tomorrow, but tomorrow never comes.
Studies show that there are two main stories to explain our for procrastination:
“I wouldn’t even know where to begin” and/or
“I would do it but I don’t know how”
Sometimes the task is just too overwhelming or merely inconvenient for this time in your life. Like hockey icon Wayne Gretzky once said;
“I missed 100% of the shots I didn't take”.
But without starting, you can’t never get even begin your debt reduction journey, and there is no hope of relief. Remember, when you start any project with many parts, you can begin with only a few small steps. It is once you begin with those small steps that energy keeps you going.
When all else fails, the starting point on the road to rescuing yourself from debt is simple:
STOP USING CREDIT!
Don’t finance anything. If you need a credit card for monthly gas and grocery bills, etc., make sure the balance is manageable and can be paid in full each month. The next step is to………
Step 2: Simplify your life!
Once you’ve committed to quitting credit, the next step is to declutter your financial life. This will make the work less overwhelming, give you a clearer picture of where you are now, and ease you into developing a debt ending program.
Its important to understand what to throw away and what to keep (as organized as possible) so you can get to it when it is needed. Simplicity is the key!
“Life is finding a place to keep your stuff”… George Carlin.
The most common question I am asked is, how long do I keep ‘stuff’? First, it is not necessary to keep every single receipt and deposit slip you accumulated since leaving elementary school. Certainly, there are some documents you should never throw away. These may be either important to your loved ones, associated with something of significant value, and/or hard to replace. However, most of the papers in your overloaded files can be thrown away after a period of time. Here's a review of their lifecycle:
Documents to keep forever:
Security cards.
Birth and death certificates.
Marriage license.
Passports.
Military discharge papers.
Wills, trusts, powers of attorney, divorce/separation agreement.
House documents. (Deeds and mortgage)
Investment records. (Retirement, college)
Automobile titles.
You may add other items, but only if you can categorize their value as timeless, legal or sentimental. The rest of the documents have a certain shelf life. Label four file folders or envelopes as follows:
Documents to keep for up to 3 years
All tax related information should be kept, organized and stored for up to 3 years. The IRS can audit you for up to three years after you file a tax return. You should save all receipts that verify deductions for 3 years from the date your return was filed or 2 years from the date the tax was paid -- whichever is later. For example, you should keep:
Medical Bills.
Records of selling a house or stock.
Any receipts, cancelled checks and other papers that support income or deductions on your tax return
Documents to keep for a year:
Paycheck stubs – Compare them with your year-end W2.
Cancelled checks (keep for 3 years if they verify a tax deduction)
Utility bills
Credit card receipts
Bank statements
Documents to keep for a month
ATM deposit, withdrawal and debit card purchase receipts
Documents to keep until the warranty ends
Sales receipts
Step 3: Get Organized.
Once you’ve decided what is worth keeping, there are several ways to store your documents. Some of my favorites include: Pocket accordion file prganizers, document storage programs, record management system.
An inexpensive scanner may also be a useful purchase (purchased with cash, check or debit card only, of course). Digitalizing important documents and storing them on your computer as .pdf files is an excellent backup to pounds of paper. Also, .pdf files of all important product manuals can be kept in a separate file on your computer. Most are downloadable if you have the product name and model number.
Beyond physical and digital storage, maintaining a simple and clear record management system is critical to the success of any debt reduction. To maintain the “keep-it-simple” theme of debt repayment there are only two forms you need:
Completing this form will accomplish two things. First, it will provide a snap shot of all the information you will need about your current debt status. Second, updating these records monthly will also serve as a morale booster as you will see the fruits of your labor; the lowering of your credit card debt.
If you now have any cards that have special lower interest rates, it is a good idea to keep track of the month and year when these rates expire. Even though credit card companies give you advance notice of a rate changing, they don’t make a big deal about it. You should definitely keep track yourself and consider replacing them with comparable cards offering reduced rates. We’ll discuss this in more detail later.
By listing all your estimated income and expenses for the next six months on their appropriate dates, you will get a snap shot of your cash flow during different time periods. This is possibly the most important indicator of how much money is available at various times. For instance, you may have a life insurance bill that you pay quarterly and will have to budget for when considering spending habits one month earlier. If you are computer savvy, a good program to use is Microsoft Excel©.
Projected Checkbook Example
In the first column, list all the dates for the next six months, skipping rows where you expect several expense or income entries on the same date.
You can add date rows to accommodate any current variable expenses (groceries, gasoline, entertainment, etc.) as you go along. The “Miscellaneous” column can be used for confirmation #’s if you make advance bill payments on the internet.
In the “Income” column, list all your paychecks or any other income next to the dates they are expected to be received or direct deposited. Next, list all your recurrent monthly expenses on the dates they are due.
Step 4: Build your Emergency Fund.
To avoid struggling with an unexpected expense and not using a credit card for emergencies, you have to first put some money aside.
About $1,000 to $1,500 is good for a start. Don’t use this account for routine expenses. It’s there for new tires or a clothes dryer when the old one suddenly quits. The account this money is stored in should NOT be reachable with a debit card, but transferrable to use within a short amount of time.
Building this small stock pile of cash will help you stay out a debt as unexpected expenses come up throughout the journey of debt reduction.
Step 5: Take on a Debt Repayment Plan Yourself (you can do it!)
OK, you’ve stopped using credit, simplified your record keeping and contributed to an emergency fund. Now let’s tackle your existing debt.
Debt elimination methods involve one simple issue. You have to spend less than you earn! This isn’t being cheap it’s just going on a spending diet!
Remember, the key is patience and persistence. It’s like beginning a diet or an exercise program. Results don’t always show up right away. In addition to the math, reducing debt is about attitude. Emotionally, a good start may be to eliminate the debt(s) that bother you the most. Perhaps a loan from a relative or an irritating dental bill.
There are different views on where to start. Some say you should first pay off the card with the lowest balance. Others say you should start with the card that has highest interest. I don’t think any one approach is better than the other. It’s where you feel the most comfortable. I personally feel that paying off the lower balance first may be better psychologically. One less monthly payment and you can cross the card off your list!
Step #1 Try to Negotiate Lower Interest Rates on Your Credit Cards
Call each credit card company, starting with the one with the highest interest rate and try for a reduction. This is a huge challenge that does not often bring favorable results but certainly worth a try.
Step#2 Understand Balance Transfers: A Way to Reduce Credit Card Debt
Attractive credit card 0% balance transfer offers are only sent to the people with a good credit score. As your credit score improves consider these cards for balance transfers to replace all or part of your highest interest rate card. The more of your payment that goes toward principal and the less toward interest, the better! These card companies charge a fee (usually 3% to 5%) of the balance to be transferred. You have to do the math to determine if paying the fee is worth your interest savings. There are websites that supply free calculators that can make you job easier.
Step #3 The Snowball Method vs. Avalanche Method: Which is Best for Reducing Credit Card Debt?
Decide which credit card you want to pay off first and decide how much over the minimum payment you can make. After you pay off one credit card, apply the money you have been paying that particular company to paying off another credit card.
1. How long it will take to pay off your debt, and how much interest you will pay over the life of your debt if you only make minimum monthly payments.
2. How long it would take to pay off your debt and how much interest you would save by making a larger payment.
3. Make the minimum payment on all credit cards except for the one you want to pay off first and throw all you can at that debt..
This is a critical step. Do not miss any payments!
Step #4 Explore ways to get additional cash to pay off your balance sooner
Use eBay, Craigslist or the Amazon marketplace to raise cash from the things you own and may no longer need. Consider taking an extra job or working some overtime.
To summarize…..
Stop using credit cards!
Pay as much as you can afford each month!
Cut your spending!
Double up on payments!
Use windfalls to pay down balances!
Freelance to earn extra money!