6 Steps To Creating A Debt Payoff Plan
I have little money and a whole lotta debt. How do I create a debt payoff plan?
Congrats! Deciding to pay off your debts is a big decision. A quick Google search will bring up millions of debt payoff options. If you’re like me, you may go into “analysis paralysis” and do nothing.
You can create a debt payoff plan that won’t make you reach for a bottle of Advil. The key is to create a debt payoff plan you can stick with based on what works for you. There are no right or wrong debt payoff plans — except not having one.
When you create a debt payoff plan, expect to tweak the plan to what’s best for you and your family. Hopefully, this will take the pressure off to “pick the right plan” or “get it right the first time.”
For instance, we followed David Ramsey’s plan to get out of debt, but we adapted his plan. We felt better having closer to $2500 vs. $1,000 in savings. We started with the debt we hated the most, then focused on paying off the lowest balance (Debt Snowball). The emotional baggage we lost when we got rid of that debt was worth it.
Create a debt payoff plan that works best for you in 6 Steps:
Get your financial basics in order
Decide when you will start to pay off debt
List your debts
Prioritize your debts
Decide on the amount of your extra debt payment
Decide on the intensity of your debt payoff strategy
GET YOUR FINANCIAL BASICS IN ORDER
To create a debt payoff plan, you must first get your financial basics in order. Before you start to pay off your debts, first:
Have a detailed budget to account for your spending, so you know how much extra you can put towards debt.
Have at least $1,000 saved for emergencies. Cars will still need repairs, and unexpected expenses will pop up. The last thing you want is to pay down debt, get hit with an unplanned expense that puts you back in debt.
Stop using your credit cards. Paying off credit card debt while using your credit card is like driving in mud. You think you are making progress, but you’re going nowhere. Commit to no new debts while paying off your old debts.
DECIDE WHEN YOU WILL START TO PAY OFF YOUR DEBTS
After you have the basics down, also make sure you’re in the right season to tackle debt:
If you are facing a loss of income, the priority is to focus on savings to protect the QUAD of Stability, your essential living expenses:
If you face a significant life event- birth, death, divorce— the focus should be on savings since all of these life events come with unpredictable unexpected costs.
LIST YOUR DEBTS
If you have the financial basics covered and no major life events going on, then the next step is to list your debts, so you know exactly where you stand. As you list, your debts include:
Name of Your Debt
Monthly Due Date
Interest Rate
Total Balance
Minimum Payment
The amount you’re paying
Estimated Payoff date
PRIORITIZE YOUR DEBTS
Once you’ve listed your debts, next use the list below to pick which debt you will prioritize. A rule of thumb is first payoff government debt- IRS or State taxes. This is because the government has almost limitless power to garnish your wages or seize property.
Debt Snowball
The Method: You first pay the lowest debt balance to the highest debt balance
Who best for: You feel defeated and need quick wins to stay motivated.
Debt Avalanche
The Method: You first pay the debt with the highest interest rate to the lowest interest rate
Who best for: The math nerds and those who want to pay the least amount in interest.
Cash Flow
The Method: You pay off the debt with the combination of the highest monthly payment/lowest payoff date
Who best for: You have debt that takes up a large amount of your paycheck that is also close to being paid off.
Shortest Payoff Debt
The Method: You start with the debt with the least amount of payments
Who best for: You have a debt nearly paid off
Most Financially Damaging
The method: You start with creditors that can garnish your wages, are ready to take you to court, send you to jail, etc. The creditors can wreak havoc with your life.
Who best for: You owe the government- tax (federal or state), defaulted student loans, judgments, or liens.
Emotionally debt
The method: You start with the debt you hate having the most, i.e., divorce lawyers
Who best for: You have debt that reminds you of an emotionally challenging season, and every payment sinks you into anxiety and depression.
Use this debt payoff calculator to test drive the methods above to find the best one for you.
DECIDE ON THE AMOUNT OF EXTRA DEBT PAYMENTS
Once you’ve picked a debt payoff method, next decide HOW much you are going to put towards your debts
Look at your budget and set a realistic amount of money you’re committed to using to pay extra on debts. Consistency is critical, so start slow, with a small amount and increase over time.
Consider using your current total minimum amount as your baseline. As you pay off debt, the recently paid off debt minimum payment, in addition to extra payments, gets rolled into the next debt until you are debt-free.
Commit “windfalls” to your debts. Commit extra money such as tax refunds or bonuses towards your debts.
DECIDE ON WHAT YOU WILL SACRIFICE TO BECOME DEBT FREE
Decide your level of intensity toward paying off debts. Your entire family needs to agree on the level of intensity, and no answer is wrong. For instance, you can decide you will focus on paying off debts ASAP, which means you will:
Get a second job
Commit to no travel vacations or limited vacations until you’ve paid off your debts.
No eating in restaurants
Gifts only for kids. You and your spouse will not give each other gifts until debt-free.
No upgrades - cars or homes until you pay off all your debts.
Also, dream and decide what you WILL do once you’re debt-free.
Family dream vacation- Disney, cruise, resort
Spa day
Dinner at a restaurant you normally would not go to
Most importantly, be patient. Most people see paying off debt like this:
When paying off debt is more like this:
Your debt payoff journey will have peaks and valleys. Remember, it’s all about consistency vs. perfection. You will become debt-free if you are consistently budgeting, keeping a minimum of $1,000 in savings, and staying out of debt while paying off debt.
As you work to create your debt payoff plan, remember to:
Get your financial basics in order
Pick a date to start paying down debts
List your debts
Prioritize your debts
Decide on the amount of your extra debt payment
Decide what you are willing to sacrifice to pay off your debts.
NEXT STEPS
Use a debt payoff calculator like Vertex Debt Reduction Calculator or CalcXML Debt Payoff Calculator to develop a debt payoff strategy. If yo u want a complete debt payoff plan that you can integrate with budgeting apps like YNAB, consider using Undebtit or other debt payoff programs.
