Tips for Starting a Personal Debt Elimination Plan

Managing debt is an important skill to learn for anyone. A person who has taken a few loans as a young adult would know how quickly the interest on debts piles up. Though it is impossible to pay everything off overnight, having a plan is necessary for staying on. Read on for tips on making a debt elimination plan.

List down All Debts

Use a credit monitoring platform to get a free report on any active debt accounts and their balances. Note that certain types of balances like medical debt might not show up in reports, so double-check the entries and ensure that all accounts are present. 

After compiling a list, the next step is listing these accounts in spreadsheets together with the current balance, minimum payments, and credit limit. Include the payment status and interest rate; it can be motivating to see one’s progress.

Monitor Spending

Managing debt involves developing a budget and monitoring one’s spending. This step comes first because knowing the context helps people in formulating solutions. Going over previous bank or credit statements is an excellent place to start.

Establish a Budget

After figuring out one’s spending habits, one can start creating a budget. Basic budgets outline the income and expenses for each month. The aim is to have more money coming in than going out—people able to maintain this will be on their way to full debt repayment.

There are different budgeting systems available. Three common ones are the 50/30/20 method, the envelope method, and the zero-based budget. Here is a closer look at each of these.

1. Using the 50/30/20 Method

In the 50/30/20 method, the person divides their spending into needs and wants. They allocate 50 percent to needs like repaying debts, buying groceries, and paying for rent and utilities. Meanwhile, 30 percent goes to wants—dining out, hobby-related purchases, and vacations fall under this category. Finally, the remaining 20 percent is for savings.

2. Using the Zero-Based Budget

In the zero-based system, the person earmarks each dollar for a specific purpose. The goal is to leave no unallocated money at the end of the month. People who use this system to create a budget for debt repayment must count any excess money at the end of the month towards repaying debts.

3. Using the Envelope System

With the envelope system, the person sets limits for each category they usually spend in—they set aside “envelopes” with the amount they’ve decided as the limit for each. For example, a person can have envelopes for utilities, subscriptions, online shopping, and more. 

In this system, one can only use the money they’ve put in each envelope until the end of the month. Once everything’s gone, they have to wait until the next month to spend in the category. Using a debit or credit card to augment envelopes is highly discouraged since it defeats the purpose of having a limit for each category.

Be Strategic About Payments

Eliminating debt is not a one-time deal, especially for people who have months or years of repayments to make. There are different techniques—for example, the snowball method involves putting most of their debt repayment budget toward the smallest debt balances and making minimum payments on others. There’s also the avalanche technique, where the person puts their extra money toward the balance with the highest interest rate while making minimum payments on others.

Some might think that it is better to pay debts with higher interest rates. However, the best way to tackle debt is to create solutions that fit one’s budget, lifestyle, and goals. Following an existing debt repayment method or creating one with the help of a debt relief professional will put a person on the track to financial freedom.

Conclusion

Figuring out how to get out of debt can be overwhelming for many people, but it is possible with the right repayment plan. It isn’t difficult to save money and reach one’s financial goals, even as they pay down high balances if they have a debt elimination plan.

DebtHelpers.ca provides customized personal debt solutions in Canada. We are in Mississauga, ON, and we offer a range of consulting services geared toward helping people become debt-free. Schedule a consultation today!