Learning how to prioritize your debt is a beginning step to formulating your debt payoff strategy. Having a plan to pay off your debt is the key to success. Having a plan (and sticking to it) will allow you to pay off your debts faster, easier, and with a lot less stress!
The first step in setting up your payoff plan is to prioritize your debt. Do you know how much debt you have in total? Do you know how long it will take you to become debt free if you only pay the minimum balances? How about how much extra you’ll pay in interest charges? These are essential facts that you need to know. You need to know them to stay in control of your finances, and to become the rockstar money managing machine you’ve always wanted to be!
How to prioritize your debt:
Lay it all out in front of you. Take all of your debts and spread them out across the kitchen table. Each debt gets it own separate sheet of paper – OR index card.
- Write who you owe the money to. If it is one on many student loans right the loan number next to the company name. Example: Sallie Mae 01-45
- How much you owe (The balance)
- Write down the interest rate
Organize it! Start moving the sheets of paper around. Start by laying them out in order of the smallest balance to the largest balance. Paying off your debts in this order is called the Debt Snowball Method. It is where you pay the smallest balance first, and then once that is paid you roll the monthly payment into the next smallest debt so that you are paying that minimum payment plus the minimum payment from the first debt.
If you organize it from the highest balance to the smallest balance it is called the Debt Avalanche Method. It has the same thoughts as the debt snowball, but you pay the highest balance first (Which will take the longest) and then roll that money into the next highest.
IF you are very strong-willed and can stay focused for a long period of time (Possibly Years) the debt avalanche method could work for you. I, however, recommend the debt snowball method because it allows you to get a lot of “wins” early on, which really does help you to stay motivated throughout the process.
Now that you have your cards laid out in the order in which you will pay them. Pull out any high stress … keep you awake at night debts. Also, pull out any debts that your wages are being garnished for. Those debts you will pay off first! Pay those off to lift the burden, and then begin paying down the debts in the order in which you laid them out.
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Stay motivated. This is key. You can have the best-laid plans, but if you do not work them, you’ll be in the same if not worse position next year! I use my Financial Planner as a way to keep us motivated and informed on our finances all year long. I have also recently been doing a Google Spreadsheet of our budget to help keep the motivation IN ADDITION to adding the debtfreecharts.com to my money management folder. We have halfway through our debt free journey, and I won’t lie – the motivation is lacking a little. By adding the spreadsheet and the debtfreecharts, I have been able to ramp up my motivation – and even increase our debt payoff monthly amount.
Find your motivation – and when you lose it, find a new source!! You are the only one who can do this. Make no excuses – just make a change.
Become Debt Free!