Debt has a way of taking us by surprise, no matter if it’s accumulated slowly over time or all at once due to unexpected financial hardship. When struggling with debt, you might wish you could jump in headfirst and start paying it off without a plan. However, making payments towards debt without having your finances in order is like putting together IKEA furniture without looking at the instructions: you’ll think you’re finished, only to find three extra screws and an additional piece! By not taking the time to plan out your path to financial freedom, you might end up with late fees, excessive interest rates, and an overwhelming sense of frustration. So before rushing into paying down debt, make these five financial moves first to set yourself up for success.
1. Align Your Finances With Your Values
Before you even begin looking at numbers, it’s a good idea to do some reflecting on what you value and how that translates to your finances—including your debt. First, create a list of everything important to you, such as family, security, personal growth, happiness, etc. Then, list all of your expenses from the past month, such as mortgage payments, student loan payments, personal loan payments, etc. Finally, try to tie these expenses back to your values. For example, you could think of your mortgage as a means of keeping your family safe and secure with a roof over their heads. Similarly, you could reframe your student loan as a reminder of the personal growth that education brought you.
Why are we suggesting you do this? First, we’ll level with you: tackling significant debt can be a long process, and there will be times where you may feel like giving up. However, by realigning those debts in terms of what you value, you’ll transform them from regrets to reminders of what you hold dear. This kind of positive thinking can make both the low points of your journey less daunting and your overall end goal feel more worthwhile.
2. Dive Into The Details
Once you’ve changed your debt mindset, it’s time to crunch some numbers! Understanding the total amount you owe is crucial in empowering you to create a repayment plan that works for you. The first step is gathering all your debts into one place. Whether that means compiling an Excel spreadsheet, using pen and paper, or utilizing an app, you need to be able to tally up what you owe across your various accounts.
Once you have the total amount of debt that you owe, then start getting into the nitty-gritty details. For every outstanding balance you have, you’ll need to know these 3 things:
- The due date for every payment
- The minimum monthly payment amount
- The interest rate charged
These details are essential in determining the best means of repaying your debt, whether that be through monthly payments, debt settlement, or bankruptcy.
3. Create a Budget
The importance of building a budget can’t be understated. A budget is a linchpin to any financial plan, but it becomes especially vital when you’re tackling debt. There’s quite a bit of debate on the “best” budgeting method, but the truth is that budgeting isn’t one-size-fits-all. What works for your sibling or friend may not work for you, and that’s okay! Your financial situation is unique, and your budget should be designed to fit it—not the other way around.
However, if you’re looking for somewhere to start, we recommend the 50/30/20 budget. In this system:
- 50% of your monthly income should go towards your essential expenses, such as housing or car payments
- 30% is allocated to your wants
- 20% is used for savings and debt
Of course, given that your goal is to pay off your debt quickly and easily, you may decide to move a percentage from your wants to make extra payments. Still, the 50/30/20 budget provides a great starting point for figuring out what best suits you.
4. Find Some Wiggle Room
Mindset adjusted? Check. Debts calculated? Check. Budget created? Check. What could possibly be left to do?
Given that your goal is likely to pay off debt as quickly as possible, it’s a good idea to think about where you can find some extra money. There are two primary ways of doing this: generate additional income or find areas to cut costs in your budget. Making more money could be as simple as selling unwanted or unused items or as complex as creating an entire side hustle. Still, the idea is to make enough for a few additional payments toward debt. Cutting costs could involve canceling subscriptions, working out at home, taking public transportation, and more! It all comes down to what you feel you can sacrifice without negatively affecting your mental health and wellbeing. After all, becoming debt-free should be as painless of an experience as possible!
5. Prioritize Saving
You might be thinking, “how can I think about saving when I have all of this debt to pay?!” While your savings and retirement accounts may fall low on your list of priorities, think about what we said earlier: things can change in a single second. You may find yourself falling deeper into debt if you’re unprepared when an unexpected expense arises.
A good rule of thumb is to have around 5 to 6 months’ worth of your monthly expenses tucked away in an emergency fund, but we understand that this isn’t always realistic when you’re still struggling with debt. When you’re dealing with debt while also trying to save, you should have enough to cover at least 3 months of expenses. But no matter what you can afford to set aside, having even a small amount of money put away for emergencies is better than having none.
Get Ready for Success!
By making these financial moves, you’ll feel more confident in your ability to pay off debt and manage your finances.
If you are struggling with $10,000 or more of debt, request a Custom Debt Relief Plan from one of our debt specialists today. Explore your debt repayment options with an expert who will take the time to evaluate your unique financial situation. Contact us today!