Debt payoff plan: Determine the Size of the Fight
Disclaimer: This article is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs.
To create a debt payoff plan you need to get the following information about each of your debts:
- Current Remaining Balance
- Interest Rate
- Payoff Date (based on minimum payment)
This information can easily be found on your monthly statements. Sometimes the Payoff date may not be available. In that case you can use a debt payoff calculator to determine when you will be finished paying your debts.
Gather this information for any debt that you may have. Below are the typical types of debt that people commonly take on. These include the following:
- Credit Card Debt
For Credit Card debt include major credit cards, as well as any store credit cards.
- Personal Loans
Personal loans is debt borrowed from a bank, credit union, or other lender. Personal Loans are unsecured debt unlike a mortgage or a Car Payment there is no underlying asset for Personal Loans.
- Student Loan Debt
Include all student loan debt. Include both federal and private student loans.
- Car Payments
- Mortgage
If you own a home, apartment, or a condo include your mortgage in your debt pay off plan. If you are renting there is no need to include your housing expenses in your debt pay off plan.
Debt Payoff Goals
Back when my husband and I were just boyfriend and girlfriend, we both knew that we wanted to be debt free before we got married. I wanted to enter marriage debt free. I had student loan debt, credit card debt, and a car loan at the time. At the time we were not even engaged, but I knew I wanted to be done paying back those debts within two years.
Debt payoff goals are individual and will vary, but setting them will help you stay focused and reach your goals. When you are coming up with a debt payoff goals consider the following:
- When would you like to pay off your debt?
- How will your life improve once your debt has been paid off?
This is just a starting point, as you dig deeper in to your debt pay off plan you may find that you may be able to payoff your debt sooner than you thought.
This is One of the most Important things to Consider for your Debt Payoff Plan
How will you handle new debt? Generally speaking, it is a good idea to stop taking on any new debt while you are paying off debt. This is definitely true for Credit Cards, do not take on any new credit card debt while you are in the midst of paying off credit debt. Due to the high interest rates on credit cards, if you are taking on more debt as you are trying to pay off these debts, it will be more difficult to get the debt down to zero.
Sometimes you may decide to take on a new car loan or purchase a home with a mortgage while you are still tackling student loan debt. You would be able to devote more money to student loan debt if you did not buy the house or the car. But you crunched the numbers and realized it would still take you over 5yrs to tackle student loan debt if you did not make the car purchase or the house purchase, and decided no to wait that long. That is ok, as long as you adjust your debt payoff plan.
Debt Payoff Plan: Frugality
My grandma is 95 years old! She lives in New York City and has lived there since she was 3yrs old and as a New Yorker she never had dreams of home ownership. Perfectly content with having shares in a co-op and maintenance men available to tend to repairs. She was in debt until her 80’s, it was never more debt than she could tackle. She made her minimum debt payments, and paid “a little extra” when she could.
She has travelled the world, spoiled her grandkids, replaced busted televisions, owned cars keeping her in debt until her 80’s. The point is she lived a very full and happy life in debt. She is to this day one of the happiest people I know. Deciding how frugal to be when paying off debt is a balancing act. You have to decide what you are willing to give up to meet your debt pay off goals while still enjoying life.
Disclaimer, I am not a financial advisor. Some popular financial gurus advise using an austere lifestyle while completely focusing on debt payoff. I disagree. It may take many years to pay off debt and you should not have to sacrifice a full life to pay off debt. I do think you should make reasonable attempts to save money in order to put it towards debt. You must have a plan to make minimum payments on your debt.
As a wife and a mother, I look back on the adventures I had with some of my good friends and I am so glad that I took advantage of that time in my life. I have vacationed with my Husband and my Son, and we had a good time. Nothing could replace those care free days with my college buddies during and shortly after college.
Spend, but spend reasonably with the future in my mind. When I was vacationing with my friends after college we weren’t staying in 5 stars hotels or flying 1st class. We were flying coach, after researching some of the best deals. If I were giving advice to my son in the future when he is about 20 years old, it would be to deviate occasionally for once in a lifetime type events or experiences, but always come back revisit your financial goals and make sure your bills are payed.
Paying off debt does not have to happen in a bubble, you should be able to continue with life while paying off on debt. On paper and in excel it may make the most financial sense to wait until you finish paying off the student loan to purchase the car. Life happens off of paper and perhaps your current car is getting toward the end of its useful life and you want to get a newer car before you start having problems. That is okay. Just evaluate how this will impact your debt payoff goals, and adjust your debt payoff plan accordingly.
Debt Pay Off Goals for a Debt Payoff Plan
A goal isn’t necessary for a debt pay off plan, but it could help keep you focused and motivated. You set a Short-Term Goal of paying off a credit card in 6 months. For 6 months, your budget may be restrictive. After that you will have more disposable income to save or spend as you choose.
Short Term Debt Payoff Goal
Your favorite store offered you an irresistible promotion to open up a new credit card at their store. An additional 30% off of your purchase today and 10% off additional purchases. It seemed like a great deal at the time. Now you are making payments on clothes, shoes, or perhaps small appliances that have loss their shiny new appeal. Now instead of paying off this credit card and accruing interest, you would prefer to use the money to reach a savings goal.
So, your short-term goal would be to payoff the credit card and use the extra money to save for a vacation, wedding, or down payment on a new home.
Payoff Debt before a Making a Large Purchase
Sometimes you may want to payoff debt before you make a large purchase such as a house. Paying off credit card debt, student loans, & other consumer debt will help you achieve this goal sooner, or be more prepared once you make the purchase. This could free up income to save towards the down payment, make repairs and upgrades, or build up an emergency fund.
Long Term Goals
You have a dream of retiring at 40, or paying off your house before you children leave for college. Paying off debt makes more income available to use toward achieving these goals. Whether is ramping up your savings for retirement, or allowing you to send your children to the college of their dreams. Setting long term goals keeps the bigger picture in focus, when bumps in the road happen.
Coming up with a Plan of Attack for your Debt Payoff Plan
You’ve set the goal to pay off debt, now it is time to decide how you will approach debt payoff. Determine which debts to payoff first, how much money to pay toward each debt, and negotiate for better terms on your debt.
Don’t Close Your Credit Cards: Do This Instead
It’s tempting to hurry up pay your credit card debt off and close your credit card accounts. To make the most of your credit payments, call your credit card company to discuss your interest rate.
Negotiate Interest Rates
In his book “I Will Teach You to be Rich” Ramit Sethi provides a script to negotiate lower interest rates. Requesting a lower interest rate will allow your payments to work for you sooner.
The table below shows how lowering your credit card interest rate saves money on interest and helps you to payoff debt credit card. For the example I used a $5000 credit card balance with a starting interest rate of 19% interest rate and a Monthly Payment of $200 as an example.
Making the same monthly payment of $200 with an interest rate of 14% gets the credit card payed off 3 months sooner and with a lower interest, a savings of almost $500. That is $500 that can be used toward other debt payoff or savings goals.
Credit Card companies will be uneager to lower your interest rate to 0% but if you are able to negotiate that deal. You would be able to pay off that $5000 debt 8 months sooner and save $1400.
| Balance | Interest Rate | Monthly Payment | Payoff Time | Interest |
| $5,000 | 19% | 200 | 33 months | $1,415 |
| $5,000 | 14% | 200 | 30 months | $946 |
| $5,000 | 10% | 200 | 29 months | $630 |
| $5,000 | 0% | 200 | 25 months | $0 |
Negotiate Student Loan Terms
In his book “I Will Teach You to be Rich” Amit discusses the art of negotiating better terms for your student loan. I personally graduated with several federal student loans which I consolidated and then payed off. I also had a student loan through a private lender, which could not be included as part of the consolidation loan.
Reduce Expenses
One of the easiest ways to reduces expenses is to look at items that don’t add value to your life. Do you have a gym membership that you only use once or twice a month? Ask the gym how much they charge for a guest pass, this will save you money on a gym membership.
Evaluate any subscriptions that are not being used. Two of the most common are Magazine Subscriptions and Cable TV Subscriptions.
Debt Pay Off Plan: High Interest vs Low Balance
There are two major philosophies when paying off debt. One is to pay off the Highest Interest debt 1st. Using this method, you will pay off the debt the fastest and save the most in interest. However, if the highest interest rate debt also carries the highest balance, it could be discouraging. For a mental boost some people choose to put money toward the lowest balance to pay off the debt.
The two most popular approaches to debt pay off are the snowball(lowest balance first) and avalanche (highest interest rate first) methods. Here are how the two methods differ according to Investopedia:
The debt avalanche method involves making minimum payments on all debt, then using any remaining money to pay off the debt with the highest interest rate.
The debt snowball method involves paying off the smallest debts first to get them out of the way before moving on to bigger ones.
The debt avalanche method can often result in lower payments over time.
The debt snowball method can be valuable for maintaining energy and dedication while paying off debt. “
-Investopedia
Use a Debt Payoff Calculator
Debt Payoff Calculators are helpful tools in creating a debt payoff plan. These let you see how to make the best use off the money you have decided to use toward paying off debt. Bank Rate has a great debt pay off calculator that allows you to include multiple debts in one payoff plan.
Using bankrate’s calculator you are able to enter several different types of debt. Additional you are able to enter the extra monthly amount you wish to contribute to debt payoff. This tool allows you to easily
Bankrate’s debt pay down calculator is available to use online.
