Considering the current state of the economy, it’s likely a smart thing to try and rid yourself of any excess debt right now. I made the comment last week that I’d like this to be the year I finally pay off my excess high interest debt. Mine comes in the form of an auto loan. What about you? Do you have plans to pay off your debt? If so, here’s a simple plan on how to pay off debt and be debt free.
Step 1: Know Exactly What Debts You Have
Step one is to fully understand your debt situation. Take an hour out of your next evening to break out your latest credit card statements, auto loan statements, student loan statements, etc. Or, if you use a program like Mint.com to simply link all of your online debt accounts.
However you do it, just make sure you fully understand what your debts are. If you think you might have some old, forgotten debts out there, you may want to get your free credit report from AnnualCreditReport.com.
Step 2: Prioritize Your Debts
Now that you understand your debt situation, step two is to apply some type of priority or ranking to the list. For me, the priority is placed on the interest rate.
The higher the interest rate on the debt, the more you’re paying every month in interest charges.
Therefore, I’m motivated to stop paying so much out every month in interest charges. My auto loan is somewhere around 8%. Whereas my home mortgage and student loan debts are a bit lower, and are also tax deductible.
Some people decide that it’s easier to pay off your debts by starting with the smallest debt: the Dave Ramsey “Snowball Method.” That’s cool, too. Whatever motivates you to pay off the debt is the best method.
Step 3: Establish a Debt Payoff Plan
Step three is to set up a payment plan based on your newly established priority ranking. You may want to put all your extra money every month towards the debt with highest priority, or you may simply want to make double payments on that debt.
Choose the method that’s right for you and your budget. Make sure you at least make the minimum payments on the other remaining debts though.
Step 4: Make Debt Payments Automatic
The fourth and final step is a key one for me. Make the extra effort to set up an automatic payment from your bank account to pay off your debts. Taking the time to setup an auto payment will help to ensure the extra payments get made.
Make sure you set the payment for a time when you’re sure to have money in the account (i.e. just after your paycheck hits).
How to Pay Off Debt For Good – Additional Steps
Some of us need additional motivation to stick with a plan. Here are some ideas:
- Find a partner to hold you accountable.
- Post your list of debts in a spot where you will see it everyday.
- Tape a mini version of your debt list on your credit card.
- Consider using a service like ReadyForZero.com.
Do you have any other suggestions for how to pay off debt in the new year? If so, leave them in the comments below.