You’ve decided enough is enough. You’re fed up with the payments, the stress, and the feeling of having your debt constantly holding you back. You’re ready to have it wiped out for good!
Making the decision to tackle your debt is the first step toward debt freedom. And if you’re anything like me, you’ll dive right in and learn as you go because, let’s face it, simply starting on a goal is the hardest part. But if you think ahead and plan your journey just a little, you can prevent obstacles (and there will inevitably be obstacles!) from slowing, or even stopping, your progress.
Five ways to keep your debt payoff goal on track
1. Know your “why”*
Do you want to have less financial stress? Stop living paycheck to paycheck? Buy a house? Pay for a wedding? Change careers? Financial independence? Early retirement?
Knowing the reason you want pay off your debt gives you the motivation and incentive to push on, even when the going gets rough. Without any clear definition of what direction you want your finances to take, debt payoff is likely to slow, or even stop, not long after starting.
*This “why” is the reason you want to make changes, not “why is this happening to me?” (which is unproductive and futile).
2. Know who and what you owe
It’s tempting to just jump in and start paying down debt, but it’s ill advised to do so without having a crystal clear picture of exactly how much and who you owe.
Organization is important to successful debt repayment. If you have your bills from all lenders, go through them and record the lender, amount owed, and interest rate on a sheet of paper, spreadsheet or free online app, such as Mint.com or Debt Eliminator.
If you aren’t sure you have your bills from all lenders, get free credit reports to find out which creditors are reporting to credit agencies. To get a clear picture, it’s best to get reports from the three main credit agencies: Equifax, TransUnion, and Experian as each may have different information. Credit Karma offers free credit reports, monitoring and tools to help you along the way.
You should then call lenders directly to get current amounts owed and sign up for online access to easily track the latest activity on your accounts. Taking the time to do this upfront work will payoff over the long haul.
3. Track expenses
Debt repayment requires paying more than the minimum monthly payment, particularly when it comes to credit cards. In order to pay more than the minimum, you have to find extra money in your budget to throw at the loans.
Without knowing exactly where your money goes, you will never know what expenses can be cut back to find the extra money. You must track your monthly expenses.
Gather your bills and receipts for the month: utility bills, credit card statements, receipts, and mortgage/rent payments and then record how much you spent in each main category (food, utilities, clothing, entertainment, etc.). Simply record this on a piece of paper or spreadsheet or use an online tool. I recommend using the Personal Capital expense tracking tool (it’s free) to make the process easier.
Evaluate those monthly expenses and decide where you want to focus on cutting back to free up extra money for debt repayment. Make a plan and experiment to figure out what works best for you.
4. Have an emergency fund
Expect the unexpected. Unexpected expenses pop up frequently, but if you anticipate these expenses and build an emergency fund to deal with them, you can avoid any further debt when you need that car repair or your furnace decides to die.
Put in whatever amount works for you ($1000 is oft recommended), but be sure to have enough to cover any car repairs, travel, home maintenance or insurance costs you foresee for the coming year.
5. Make a plan and set goals for debt repayment
Without a plan for how to repay your debt, you will have no direction and, inevitably, will hit road blocks that could stop you from reaching your goal.
Prioritize your debt. You may choose to pay off the loan with the highest interest rate first, or maybe you want to focus on the smallest debt that can be eliminated quickly to provide momentum. The snowball method is an excellent way to prioritize debt.
Write down your goal, the actionable steps you will take, create accountability and set a timeline for reaching it, but be sure to give yourself some leeway here. Diving into debt repayment by severely cutting expenses leads to deprivation that can cause us to stop a short time later. Be sure you are still including some of the things you love into your budget.
Create small wins along the way to keep the momentum going. Sometimes having a large goal feels out of reach and our motivation wanes because it seems so far in the future. Set smaller goals that can be reached in a shorter amount of time to feel successful along the way to your goal of debt freedom.
Here are some tools that I use myself that you may find helpful:
Want to painlessly save more each month (without even lifting a finger!)? Try out Digit. I really thought I was saving all I possibly could. Digit proved me wrong. See my review and updates on how much I’ve saved here.
Personal Capital tracks your expenses for you for free! Have all your accounts in one place and utilize their free expense tracking tool! I use their free net worth and expense tracking tools. Sign up for a FREE Personal Capital account.