For most of us, financial safety doesn’t occur out of the blue. We have to work at it, and like any other worthwhile achievement, you’ve got to have a plan. Paying down debt is an essential part of forging a positive financial future, and without a debt payoff planner, it will be more difficult to attain your goal. Here are some crucial steps you can take today to develop your own debt freedom plan.
Make a Realistic Monthly Budget. You can’t pay off debt if you’re unaware of how much you’re spending each month. List each and every expenditure — and we mean everything — that you spend money on. This list should contain all the obvious expenses like your rent or mortgage, car loan, gas, food, utilities and entertainment. Where many budgets fall short is failing to account for “other” spending. This includes infrequent but necessary items, like the auto insurance you pay quarterly instead of monthly and bringing your dog to the vet, as well as unplanned items like snack foods from the convenience store while you’re getting gas.
Inventory Your Debts. Exactly how much do you owe on your house? How much do you owe on your car? Are you still paying off last summer’s family vacation or Christmas gifts? Again, it’s the items you forget to account for that will cause you to stumble. When you total it all up, the price may shock you. Don’t be frightened! Use the size of the mountain as inspiration to summit and surmount your obstacles.
Find Money in Your Budget to Pay Down Debt. Now that you know the foundation of budgeting, get serious. If there were a great deal of extra cash loitering around in your budget, you wouldn’t have much debt. So, you need to locate ways to reduce expenses or increase income (ideally both). Then be laser focused about using the additional money to pay off debt. Whether you use the “snowball” method or just pay off the high-interest debt first, you need to direct all available firepower on the enemy if you’re trying to win this battle.
Look at Biweekly Payments to Conquer Debt Faster. The traditional folk song says it best with the lyrics: “We worked through spring and summer / the winter and the fall / but the mortgage worked the hardest, and the steadiest of us all / it worked on nights and Sundays / and it worked each holiday / it settled in among us and it never went away.” Your home mortgage is most likely your largest single debt. After that, it’s likely your car and/or student loans. Debts like these can often benefit considerably by reduction and quicker payoff using biweekly payments.
Here’s how you do it: Rather than paying the standard monthly mortgage amount, you’ll pay half of it every two weeks instead. The extra money is then applied toward reducing the principal. And since interest is based on the remaining balance, the lower that balance, the less you end up paying in the long-term. For example, if you borrowed $300,000 to buy your home with a conventional 30-year mortgage at 4%, using biweekly payments would save you over $33,000 over the life of the loan — and you’d pay it off more than 4 years faster!
Use these tips to produce your own personal debt payoff planner. The first step in overcoming debt is to understand how much of it there is and what assets you need to pay it off.
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