I know sooo many people are eager to get out of debt, but guess what? There are some very important things you should do first. Before you start making extra payments towards your debt, please do these 6 things!
By taking care of the tasks below, you’ll be able to tackle your debt with less stress. You won’t be “robbing Peter to pay Paul” any longer and you’ll have the funds needed to address irregular or unexpected expenses, which will keep you from accumulating more debt along the way.
Stop robbing Peter to pay Paul. Do these 6 things BEFORE you start putting extra money towards your debt!Click To Tweet
Get current on all past due bills
If you are behind on any bills, you need to take care of those first before you start throwing extra money to your debt.
- Work with the companies to see if you can negotiate a reduction in the overall amount that you owe.
- Address the cause of why you fell behind in the first place.
- Was it due to a lack of money?
- Look for ways to reduce or eliminate other expenses. You can also, of course, find ways to increase your income.
- Does the expense occur irregularly and you weren’t prepared?
- You should set up a sinking fund in order to prevent this from ever happening again.
- Was it due to a lack of money?
Write down all debts
It’s pretty hard to pay extra towards debt if you don’t know what all of your debt obligations are. Check your credit reports to ensure that you don’t miss anything and make sure you include any money you owe family and friends.
What you should list for each debt:
- Creditor name
- Minimum Payment
- Starting balance | Credit Limit
- Current balance
- Interest rate
- Repayment period (if applicable)
Create & stick to a budget
Hate the word budget? Okay, let’s call it a spending plan.
First, you need to see where your money has usually been going. You do this by looking at your bank and credit card statements (try to look at the averages for the previous 3 months).
Second, you create a spending plan based on your income, fixed and variable expenses, debt and savings contributions. Looking for a place to start? Check out our budgeting series, where we walk you through the step by step instructions on how to make a successful budget.
Or, you can just grab one of our budgeting templates and skip the hard work of creating a spreadsheet for yourself.
Save for known upcoming expenses
Many people are financially thrown off track by expenses they are aware of but don’t have the funds to cover. These expenses include car maintenance, birthdays, holidays, home upkeep, etc. Certain things happen every year, so you should start making a plan for them – you will be thankful you did.
To address these expenses, many people create sinking funds (or revolving savings funds). For each expense, you simply divide the total amount by the number of months you’d like to save for and then put that amount away every month.
Save a starter emergency fund
An emergency fund keeps those “Oh Sh**” moments from sending you into financial despair. I always recommend that people aim for at least one month’s worth of living expenses – but don’t get discouraged, you can always start small and work your way up. $20 grows into $100 and eventually becomes $1000 saved!
Make sure you read our post on how to start an emergency fund
Make a debt attack plan
Making a plan for how you would like to pay off your debt will help inform you of where you’d like to direct any of your extra funds. You can choose to pay off the smallest balance first to get a quick win or you could choose to pay off the debts with the highest interest rates in order to save money in the long run.
We chose to make up our own plan by doing a little bit of both while also reducing our credit utilization on our credit cards so that we could improve our credit.
Here are a few methods for paying off debt in summary form:
Debt Snowball
- List ALL debts from smallest to largest BALANCE
- Pay minimum payments on every debt except smallest
- Put ALL extra $$$ towards smallest balance
- Rinse & Repeat until DEBT FREE!
Debt Avalanche
- List ALL debts from highest to lowest INTEREST
- Pay minimum payments on every debt except highest %
- Put ALL extra $$$ towards highest interest
- Rinse & Repeat until DEBT FREE!
Our Personal Method
- List ALL debts from highest to smallest UTILIZATION
- Pay off highest utilization until it is below 30%
- Get all credit cards below 30% utilization (helps credit score)
- Switch to debt avalanche or debt snowball method
If you want to read more about the best methods for paying off debt, start here to read about them in more detail. Remember, it all comes down to knowing yourself and having an actual plan. What works for one person, may not work for you.
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So there ya have it! Hopefully, these tips and resources will help you get on track to begin your debt-free journey.
Did I miss any steps? Make sure you leave them in the comments section below!
Stay Wealthy fam,
— Dannie
