Are you stressing over the debt you’re carrying? If so, you’re not alone. Household debt, meaning the credit cards, car loans, and mortgages, is a staggering $13 trillion, and it shows no signs of slowing down. However, despite the tremendous amount of debt out there, people are still finding ways to pay it all down. Additionally, guess what: If you commit to a plan and stick to it, you can become debt-free, too! Let’s take a close look at four steps to better debt management.
Step One: Assess Your Debt
The first step to managing your debts is figuring out what they all are. Gather statements or bills from all your outstanding debts. Make sure you capture all the outstanding debts you have, no matter how big or how small. If you’re missing information on a credit card or other loan, contact the creditor and get the relevant data you need. On a notepad or a computer spreadsheet, write down the creditor’s name, the debt type, as well as how much you owe the creditor. You can also just use our free debt calculator. You should also capture the interest rate for each creditor as well. Once you have all this information, you’re ready to move on to the next step.
Step Two: Prioritize Your Debts
Once you’ve identified all your debts, you need to determine how best to focus on paying them off. The best way to do this is to prioritize them; which ones do you want to focus on paying off first? In many cases, you’ll want to focus on revolving credit (credit and store cards) with high-interest rates. However, it may also make sense at times to pay off debts with low balances; paying them off will free up money that you can commit to paying off other debts with higher balances. If you have debts with very high-interest rates, tackling them first may be a good option as well. Talk to a trusted financial advisor when determining how best to pay off your debts, since this is the blueprint you’ll use to pay off all your debts.
Step Three: Begin Paying off Your Debts
Well, the hard part is over. You’ve tracked down all those credit card statements, listed all your debt and interest rates, and you know exactly how much you owe. Now, it’s time to start paying those debts off! As you begin to pay your debts off, you’re likely using one of two methods. You may be focusing on paying off the smallest debt first and making minimum payments on all other debts. Once that first debt is gone, you move on to the next smallest debt, and so forth. This technique is the debt snowball method. Alternatively, you may use a similar technique but focus instead on paying off the debts with the highest interest rate first, and work your way down from there. This is the debt avalanche method.
Regardless of how you decide to pay off your debts, one of the most important parts of step three is to be consistent. Pay your debts on time each month and keep track of the payments. Check them off on your notepad or spreadsheet each month as they’re paid. If you can automate your payments with a bill-paying program, try to do so; this will take much of the work out of making payments, and it’ll make it more likely that you’ll stick to your debt payoff plan each month as well.
Step Four: Assess Progress
Once you’ve established your debt payment plan, you need to gauge whether you’re meeting your goals. Every 12 weeks or so, sit down with your notepad or spreadsheet and your most recent debt or loan statements and assess the progress you’re making. Have you been consistently paying down your debts according to the plan you made in step two? If so, is your plan working? If you aren’t being consistent, is it because of a lapse in focus, or are you having trouble managing all your debts?
If you find your plan is on track, great! Sit down again in three months to do a similar assessment. If your debt payoff plan is not going well, you may have to adjust it. Moreover, if you feel that your current financial situation will make it difficult to continue paying down your debts, get help as soon as you can. A credit counselor may be able to advise you on options you have to address your debts, and can even help you work with your creditors as well.
Dealing with your debts can be challenging. However, if you’re willing to make the effort, you can pay off your debts and work toward becoming debt-free. Just follow these four steps, be consistent, and you’ll start paying down your debts in no time at all.