It would be great if, after getting our very first job, we all sat down and created our very first budget. By managing our finances from the very beginning we would spend only what we could afford and we likely wouldn’t accumulate unnecessary debt to begin with.
Realistically however we don’t live in a perfect world. Unexpected events happen and this often leads to more debt than planned.
But you can take back control. To do that you need two things:
- A workable debt reduction plan and
- A budget to make this happen.
Begin your debt reduction plan by listing all of your debts. Your list should include who you owe, how much you owe, the interest rate you are paying, your current payment and due date. Once you develop your debt reduction strategy you will add in your new payment amount. This will flow back to your budget.
Next you need to decide which debts to pay off first. Prioritizing you debts for repayment means making sure you meet all your financial goals as well as your immediate needs.
Prioritize Your Payments
First things first. Catch up on overdue payments. If you are behind on some of your bill payments, it’s probably essential that you catch up on these first. Having your hydro cut off while you pay down your credit card balance is probably not a good thing. The same goes for your mortgage and car loan arrears. If you can, catch these up. An important part of rebuilding your credit is showing that you can pay your bills in full, and on time.
If you have debts that have been referred to collections, and the constant phone calls from creditors are a distraction and causing you stress, these might be your next priority. While it might make more sense to put money towards a higher interest credit card debt, it may be just as important to reduce your overall stress surrounding your debts so you can stay motivated to keep on track. If you can, make a repayment plan with the collection agency to take care of these debts and stop the collection calls.
Now that you have the emergency items taken care of, you need to develop a plan to take care of the rest. Financially, the best advice is to pay off your highest interest debts first. To do this you should:
- Make all the minimum payments necessary on all of your debts each and every month. Do not miss any payments again now that you are caught up.
- Pay as much as you can, based on your budget, towards you highest interest credit card each month until it is paid in full.
- Once you have paid off a debt on your list, move on to the next one down the line. Apply as much extra as you can towards that debt until it is paid off.
- Continue with this approach, moving down the list until all of your debts are paid off.
We’ll finish by pointing out 3 important MUST DO’s to make your budgeting for debt reduction successful.
- You need to ‘snowball’ your debt payments. That means once you pay off one debt, you need to take the amount you were paying towards that debt and add that same amount to the next debt on the list. So if you were paying $100 for debt A, and $30 minimum for debt B, once Debt A is paid off you need to pay $130 towards debt B (not $100). If you do this, each successive debt gets paid off that much quicker.
- Do not continue to accrue more credit. If you pay off one credit card, while using another, you will never get out of debt. If you have to, put away all your credit cards until you are back in control.
- Pay until it hurts. That means putting as much as you can each and every month towards debt reduction.
If you budget for debt reduction, you may find you are able to repay your debts on your own much faster than your thought. If however you find that your debts are more than you can afford to repay within your budget, then it might be time to talk to a professional debt expert. They can help by reviewing your debts and your budget and finding a solution that you can afford.