Getting out of debt can seem like an impossible task. However, if you break down the steps and create a strategy, your journey to becoming debt free is far more attainable.
In this article, we’ve created a 6-step process to help you take a step back and create an actionable, personalized debt repayment plan. By simplifying debt relief, you can set realistic goals and make progress in becoming financially free.
Please understand, a debt repayment strategy based on your current debt levels, interest rates, and cost of living, can indeed work if you have excess cash flow. We all know how life in Canada has become very expensive in the last few years. If you do not have excess cash flow, and are not able to create additional cash flow, it might be time to look for more aggressive options. However, this article covers several practical steps that do work, if you have the cash flow available.
Step 1: Assess Your Debt Situation
The first step on your road to becoming debt-free is assessing all your balances, interest rates, and minimum payments. This will determine your total debt load and allow you to create an attainable repayment strategy.
Step 2: Prioritize Your Debts
Now you need to decide which accounts to allocate extra funds. The Avalanche and Snowball Methods are two of the most popular strategies for paying off debt. Each strategy shares the same basic principle:
· List your debt
· Arrange your debts
· Make minimum payments
· Allocate extra funds
In the Snowball Method, your debts are arranged in descending order based on interest rate. This is the more financially efficient method. Any extra funds will go toward the debt that is costing you the most in interest.
In the Avalanche Method, your debts are arranged by the smallest to the largest amount owed. Once a debt is paid off, the dollar amount you pay is allocated to the next highest debt, creating a snowball effect. While this method isn’t as efficient in the long run, it offers psychological support as you will start to close out accounts faster.
Step 3: Set Achievable Debt Repayment Goals
Next, you need to set short and long-term goals for your debt repayment. You must be realistic in assessing what you can pay back. Don’t expect to pay off 100K in two years if you make 50k annually. Set a reasonable goal determining where you need to be on your total debt in the next year and 5-10 years down the road.
Unless you win the lottery or get a significant pay increase in the near future, you should be able to calculate what you can afford each month to put aside beyond your minimum payments.
Step 4: Analyze Your Budget
Unfortunately, creating a repayment strategy typically means you must make some sacrifices. Whether it’s saving on groceries, downgrading your car, or staying home for your next vacation.
Take a deep dive into your monthly expenses and see where to save. Hopefully, canceling a couple of unused services will get you close to putting enough money aside each month to get ahead on payments.
Step 5: Negotiate with Creditors
In many cases, creditors or collection agencies will agree to take less than the amount owed if you pay in a lump sum or schedule automatic monthly payments. Saying that, this step is not as easy as it sounds. In fact, people can often put themselves in a compromised position when going this route. You may need to seek professional advice if you choose this step. Remember, the creditor is not your friend. It is their job to collect money from you.
Step 6: Monitor Your Progress and Make Adjustments
When you assess your total debt owed, understand what you can afford, and set goals, you are in a position to monitor your journey to becoming debt free. Every couple of months, check where you are at on your account. This will keep you focused and motivated to continue chipping away at your total debt.
Unfortunately, unexpected expenses happen. If you have a medical bill, car accident, or other expenditure you didn’t plan for, make the adjustment, then get back on track as soon as possible.
Seek Professional Financial Assistance
While breaking debt repayment down into a 6-step process makes the situation less painful, sometimes you need professional help. Our team at GetMeDebtFree have helped thousands of people find debt solutions. Schedule a free consultation today and begin your journey with the help of one of our consultants.
