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7 Easy First Steps to Paying Off Debt


Aug. 14, 2017 Wisebread

Facing debt can be stressful and overwhelming. But it’s important to remember that no matter how much you might feel that you’re in over your head, debt is a hole you can climb out of. You can absolutely do this. Here are the first steps you need to take.

1. Figure out how much you owe

The first step can be the most painful. It’s time to get an overview of your debt, which means you need to add up everything you owe and take a good look at your total. That, my friends, can be a difficult moment. But that difficult moment will also provide you with the clarity you need to start taking back power over your financial future.

How to do it

Gather your financial statements or log in to the online portal for each account you owe on: your credit cards, mortgage, student loan, car loan, lines of credit, home equity loan, etc. Create a simple spreadsheet with four columns: one to identify each debt (“Student Loan”), one for the amount owed, one for the minimum monthly payment, and one for the interest rate. Pull your credit report to search for outstanding debts, and compare the information against what you have in your own records.

2. Sort and prioritize the debt list

Now it’s time to start sorting out your spreadsheet entries so you can come up with the best possible plan to get out of debt.

You might think that the most important debt to pay off is the biggest one; however, it’s often a good idea to identify the debt with the highest interest rate and knock that out first. This is known as the avalanche method of debt repayment. Higher interest rates lead to faster debt accumulation and result in you paying a higher amount over the course of your debt repayment. The faster you can get rid of high-interest debts, the better.

How to do it

Sort your spreadsheet by the fourth column, the one for the interest rate. You might see anything from a 4 percent interest rate (for example, on a student loan) to a whopping 22 percent interest rate on, say, a credit card. You may owe more principal on your student loan, but relatively speaking, you’re wasting more in interest every month on that credit card. The credit card is therefore the higher priority for complete repayment.

3. Add up your minimum payments

You don’t get to stop making payments on the lower-interest debts, even though they’re not the highest priority. Instead, you need to continue making the minimum monthly payments on all lower-interest debts while making bigger payments on your debt with the highest interest rate. Once you knock one high-interest debt out completely, you prioritize the debt with the next-highest interest rate and continue paying minimums on everything else.

How to do it

Add up the monthly minimum payments for all the debts on your list, including the highest-interest debt. This is the total, bare minimum debt repayment amount that needs to fit into your current budget. This can be a nerve wracking step, especially if you don’t have enough income to comfortably afford that total monthly minimum amount. You may need to take steps to cut expenses elsewhere, or bring in sources of additional income.

4. Determine your needed overage payment

Now it’s time to calculate the payment you need to get that highest-interest debt paid off as quickly as possible. If you keep making only the minimum payment on it, you’ll keep accumulating interest charges and it will take much longer to pay it off. Instead, think of a target timeline (maybe six months or a year) for paying off the highest-interest debt, and calculate an ideal amount you can pay above the minimum payment to achieve that goal.

How to do it

Use an online credit card payoff calculator. Enter the information for your highest-interest debt: total amount owed, interest rate, and the minimum payment. You’ll see how long it will take to pay off the debt if you only make the minimum payments. Now, instead of minimum payments, enter how many months you’d like to have it paid off in. The result will show you the monthly amount you need to pay in order to clear the debt within your target timeline.

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