How to set up a debt payoff plan and stick to it

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If you’re facing a mountain of debt, the first thing to know is that you’re far from alone. U.S. consumer debt reached $14.6 trillion in the first quarter of 2021. No matter the amount you’re dealing with, it can feel impossible to tackle. However, a solid debt payoff plan is key to finding a debt-free future and taking solid steps toward personal financial strength.

What is a debt payoff plan?

A debt payoff plan takes a comprehensive look at all the debt you owe and organizes it into a structured, consistent routine to pay it all off. Because debt can be overwhelming, a successful payoff plan transfers it to manageable steps. The plan will consider all of your debts, your income and your monthly budget.

The end goal of a plan to pay off debt is to make sure you have a financially secure future. Living in debt means you’re less likely to be able to purchase things you want or even live with the quality of life that you desire. Once you pay it off, you’re giving yourself the freedom to choose how money affects your life, rather than letting it control your well-being.

What are the types of debt payoff plans?

There are several different debt payoff plans you can consider. While you can also get a debt consolidation loan, these are strategies to consider if they work for you.

Debt snowball

The debt snowball strategy is where you pay off your smallest debts first. Once you’ve paid off your smallest debt completely, you apply the payments you were previously putting toward it to pay the next smallest debt. This allows you to build momentum or “snowball” your payments as you pay off each debt. If you’d like to stay motivated with your debt payoff journey and like to celebrate milestones, the debt snowball may be a good option.

Debt avalanche

With the debt avalanche, you focus on saving the most money in interest over time. After you pay the minimum balances on all your other debts, you put as much extra money as you can toward your debt with the highest interest rate. After you pay off the debt with the highest interest rate, you move on to the debt with the next highest rate. The debt avalanche is ideal if your goal is to save as much money on interest as possible.

Debt management plan

A debt management plan (DMP) may help you lock in lower interest rates with your creditors and get out of debt faster than you’d be able to if you only made minimum payments. If you enroll in a DMP, a credit counselor will negotiate a lower interest rate on your credit cards and design a payment plan that allows you to become debt-free in three to six years. You’ll then send monthly payments to the credit counseling agency so they can distribute your funds to your creditor until all your debt is paid. A DMP may be a good fit if you’d like an affordable payment plan that aligns with your lifestyle and budget.

Custom method

You don’t have to go with a debt payoff plan that already exists. Think about your priorities and temperament and come up with your own custom plan. It may combine the debt snowball and debt avalanche methods. Or, it may involve the debt snowfall or debt avalanche initially and then transform into a DMP if you don’t make the progress you’d like or would like some professional help.

How to set up a debt payoff plan

List your debts

Your financial plan to pay off debt needs to start with understanding everything you owe. Being able to see it in one place will help you understand how to move forward.

To figure out all your debt, start with your credit report. You can do this online through many free resources, such as Credit Karma, Equifax and Experian. On your credit report, you’ll see a list of all your active accounts. From that list, contact each creditor and find out the balance that you owe. Your credit report will include everything from credit card accounts, student loans, mortgages and personal loans, so you shouldn’t have to search hard to find all the creditors that you owe.

Prioritize your debts

You can prioritize your debt in a few ways, and the method you choose may depend on your monthly budget, income and goals. You may prioritize by balance amount or interest rate. Another option is to focus on credit card debt first, for example, and then move onto your personal loan debt, student loan debt and other types of debt. You can also pay off your debts in collections initially and then work on the others.

Find extra money to make payments

If you’ve prioritized your debts and still feel like you can’t tackle more than your minimum payments, you may need to consider actively earning extra money. This may include extending your hours at work (if possible), selling personal items that you don’t need or even adding a secondary job.

If you’re worried about burning out fast from extra work, try to find flexible options. For instance, job boards like Fiverr, Upwork and Workana exist to offer short-term gigs that can provide extra money on your own time. Keep in mind that any extra work you take on will be temporary, so it’s important to use all the extra cash toward your debts.

Knock out one debt at a time

No matter how you’ve chosen to prioritize your debt, take it one step at a time. This way, you can pay more than the minimum amount owed and pay it off faster.

9 tips to stick to your debt payoff plan

Once you’ve created a debt payoff plan, sticking with it can be the hardest part. Follow some of the tips below to make sure you’re giving yourself the best chance at success.

1. Make sure your payoff plan is realistic

A debt payoff plan should make you feel less overwhelmed by your debt. Feeling anxious before you’ve even started may mean it isn’t realistic for you.

Consider changing your priorities. If you’ve tried tackling your debt by interest rate, prioritizing by smaller balance first should be more manageable. Furthermore, you should always be able to afford necessities like food and rent. Consider if your monthly budget is unrealistic, and change accordingly.

2. Track your progress

Keep your own tracking method so you can see your monthly progress. Visualizing it will help keep you motivated to continue with your payoff plan. This may be in the form of an app, or it can be a manual method like a spreadsheet.

3. Make extra payments when possible

With any debt payoff plan, you should make a commitment toward funneling extra money toward your debt. This step will take a certain amount of discipline since it can include money you weren’t expecting. Say you make a personal sale, gain more money at work or gain money through a gift. You may be tempted to put this money toward your daily life. However, consider the fact that this money wasn’t already a part of your monthly budget. You should be able to go about your life without it, so it should be allocated toward your debt.

4. Hold yourself accountable

Let your friends and family members know that you’ve made a debt plan and find one or two people who can share the full plan with you. These should be people who you may admire for their financial strength or people you know who can keep you accountable. They should be able to review your plan and periodically check to make sure you’re sticking to it. They may even be able to offer advice if you’re struggling with certain aspects of the plan.

5. Stick to a predetermined budget

Throughout the process of creating your payoff plan, have a monthly budget that includes the money you need for necessities, an amount for savings, your debt payments and the amount you can allocate to everything else. Your budget may change if you find you’re able to allocate more money toward your debt or savings, but you shouldn’t alter the money you’re paying for everything else. Sticking with a budget that works will give you the highest chances of success.

6. Stop taking on more debt

Paying off your debt means you may have to put off big purchases for a period of time to avoid taking out more loans. During this time, you should also stop using credit cards, even for smaller purchases. Working with the cash you have simplifies your debt payments and is the best way to avoid taking on more debt.

7. Remember why you’re paying off your debt

Whenever your debt plan feels difficult or you feel unmotivated, just remember why you’re paying it off. Your individual goal may be unique, but everyone who pays off their debt will be able to achieve a better future, more freedom and less stress.

8. Get inspired by success stories

Always remember that you’re not alone. The statistics behind debt are shocking, but it proves how easy it is for everyone to incur debt of all sizes. With the large amounts of people in debt, this also means there are large amounts of people who have overcome it. Look for these success stories to help keep you motivated.

9. Keep the end goal in mind

Through it all, always keep your goal in mind. Write it down and look at it every day at the same time that you review your payoff plan and progress. Perhaps your goal is to buy a home, or have enough money to start a family with less stress. This goal is personal to you and can help guide you every step of the way.

The bottom line

Paying off your debt isn’t easy, but it’s achievable with a structured and realistic debt payoff plan. The secret to success is organizing your debt, starting small, holding yourself accountable and maintaining your personal goals. It may not happen instantly, but after a certain period of time, you’ll be able to live debt-free and with the freedom to make stronger financial decisions.