Although almost everyone who is in debt would love nothing more than to pull out of debt, many simply don’t understand how to create a personal debt payoff plan in order to do so, especially if they are currently on a low monthly income.
While it certainly isn’t easy and requires proper planning as well as financial discipline, you can get on the right track and eventually pull out of debt altogether by knowing the right steps to take.
For your benefit, here are the five steps to follow when creating a personal debt payoff plan that actually works.
1. Conduct a Complete Financial Analysis
The first step to creating a personal debt payoff plan is conducting a complete financial analysis of all your monthly financial activity.
The best way to conduct a month long financial analysis is to record all data of your financial activity for an entire month. After the month is over, you should have clear documentation of where your money goes each month.
The ultimate goal is to have your monthly post tax income outweigh your expenses and debt payments that are to be made each month. In the event this isn’t the case, you may need to look to cut money where it is possible. For most, there are areas where they are able to cut back how much they spend – such as eating out less frequently.
Be sure to also take into consideration all income streams that you have access to, including your spouse’s income or possibly a side business you own. Through conducting a complete financial analysis of your monthly earnings and spendings, you should have a fairly good idea as to your overall financial situation.
2. Determine Your Debts and Rank Them
After gaining a full understanding of your financial situation, it’s time to look closer at the debt you have. The best way to do so is to check your credit report using a trusted source, which should give you accurate insight as to who all you owe money to, how much you owe and whether or not the source of debt is hurting your credit.
After finding all sources of debt and conducting research to find out how much you owe and your current relationship with them, it’s time to rank the debt from the most important to least important.
In most cases, the best way to do so is to rank them from the loan service you owe the most amount of money to down to the least amount. While it may be tempting to pay off the lower amounts of debt first, it’s better long term to start paying off as much as you can of the larger amounts while slowly paying the smaller debts over a larger period of time.
3. Seek Other Sources of Income
After gaining a full understanding of both your expenses and debt, and then weighing it against how much you make each month, you should have a fairly good understanding of whether or not you can cover the payments in a reliable, consistent manner.
In the event your expenses – which include your debt – outweigh the amount of money you bring in each month after taxes, then you should consider other sources of income.
The easiest way to make additional money outside of your full time job is to find a part time job that provides some flexibility and work when you have the time. For example, if you are a good salesman, you can work on a commision basis selling products or services for a business. If you love sports and know a lot about a particular sport, you can potentially work as a sports official on weekends and weeknights.
If you simply don’t have the time to take on a job of any kind, then perhaps you have unwanted items lying around the house that hold some value, such as an old car or signed sports memorabilia. Selling unwanted items can be a great way to quickly relieve a lot of stress caused by debt.
4. Create a Realistic Budget
After getting your finances in order, meaning cutting expenses and gaining revenue whenever it is possible, you are then ready to put together a realistic budget that allows you the ability to pay off debt in a consistent, reliable manner.
When creating your monthly budget, be sure to include every detail you can think of no matter how small it may seem. For example, if you typically purchase snacks from the snack machine while at work, be sure to include it into the budget. As mentioned, make sure to cut out any frivolous spending from your lifestyle and put the money towards paying down debt.
The ideal budget should cover all of your necessary expenses using your monthly revenue, and then the excess money should go predominantly paying down debt. Another great method to utilize when budgeting is to set aside money each month into savings, which can be done easily using an automatic transfer that allows you to transfer money directly into savings upon depositing your paycheck.
With all that said, be sure to budget for several fun activities each month as well!
5. Follow Through and Stay Consistent
Without following through and staying consistent with the detailed budget that you have put together, it is all useless and are you are more than likely headed towards failure. Subsequently, remaining consistent is the most important process to paying off personal debt, and using resources such as a debt payoff planner can be helpful in doing so.
However, paying off debt in a consistent manner is much easier said than done. Along with using a debt payoff planner, one of the best ways to ensure you stay consistent is to find a motivational factor for paying off your debt, such as taking a vacation overseas once you are finished or being able to place money into your child’s college fund.
While paying off debt may seem difficult, you can do so relatively quickly by following through on the plan you’ve put into place and not faltering as you go through the process. Always remember, there is a light at the end of the tunnel.
If you have any helpful advice for people who are trying to pay off financial debt, leave a comment with your best tips in the section below.