The Complete Guide to Creating A Debt Repayment Plan

Today, we’re going to be wrapping up the Debt Repayment Plan Series! We’ll be putting it all together to create our successful debt repayment plans!


If you have been following along with the Debt Repayment Series, you’ll notice a lot of today’s final post is a review of previous posts. If you would like more detailed information on a specific topic, simply click on the heading to be taken to the original post.

What is a Debt Repayment Plan?

A debt repayment plan is your plan of action for how you are going to handle paying off your debt. It includes everything from the total of all your debts to the order you will pay off your debts into the amount of month you contribute to repayment monthly.
 
Having debt repayment plan is crucial to successfully paying off your debt in a timely fashion. Of course, you’ll get out of debt eventually if you pay the minimum payment, but you could get there much faster if you took the time to develop a debt repayment plan. Creating a plan helps you to save time, money, and other resources.
 

Why Do I Need One?

Having a debt repayment plan saves you money

When you take the time to develop a debt repayment plan, you create a plan to pay less interest.
 

Having a debt repayment plan will save you time

Paying more than the minimum will allow you to pay off your debts early (just make sure you check all terms of repayment to verify there is no prepayment penalty).

Having a debt repayment plan allows you to determine a debt-free date

Taking the time to really look at your financial situation, looking at your total debts, and figure out exactly what order you’re going to pay things off allows you to calculate your debt-free date.
 

Having a debt repayment plan helps you to alter and trim your budget (which you definitely have)

Having a debt repayment helps you to prioritize your spending. Ask yourself if what you want to buy is more important than being debt-free. This is not to say you should never buy anything but budget your discretionary fund.
 

Having a debt repayment plan helps to keep you motivated

A debt-free date is very motivating since it represents the beginning of a new life without debt. Just continue to focus on the end goal: being debt-free and moving forward with your life goals.
 

How Did I Get Here?

Gather Your Statements

To figure out exactly where to start, you’ll need to collect the most recent statement for all your debts. This includes loans, mortgages, credit cards, store cards, past due bills, etc. Everything you owe. Find it and list it.
 

Look at Your Financial History

Most of the time, we learn how to handle our money from our families.
Take a minute to think back on your history; go back as far as you can remember. Use this time to ask yourself the following questions:

  1. What did you learn about money from your family?
  2. Why are you wanting to change?
  3. Can your purchase wait?
  4. Why do you want to buy it?

If these answers surprise you, don’t be scared. Now you know where you need to focus to improve your habits.
 

Is There Something I Need to Do First?

The first step to decreasing debt is to stop acquiring more. Don’t use your credit cards, take out another loan, acquire more fees, etc., if you can help it. Try really, REALLY hard.
 
The second step is to track your spending. For the next month (or up to 90 days), write down absolutely everything you buy: Starbucks, gas, vending machine food, a gumball, etc. EVERYTHING. Write it down. Be prepared for the idea that you may not like what you find.
 
Tracking your spending lets you:

  1. Know what your weak spots are.
  2. Adjust your spending habits more easily because you can recognize them.
  3. Create a realistic budget.
  4. Know where to make cuts in your budget categories.

 
The third step is to reevaluate your budget, based on what you learned in step two.
 

Why Do I Even Need A Budget?

A budget is a monthly plan of how you will use your money. This includes paying bills, paying on debts, savings plans, and other monthly needs.
 
Budget Quote Ramsey
 
You need a budget because, without one, you’re giving up control of your money. Having a budget will help guide you towards success each month instead of towards debt.
 
You need a budget to:

  1. Keep your spending habits in check.
  2. Set and follow through with your financial goals.
  3. Spend according to priorities.
  4. To plan for retirement.
  5. To keep the future in perspective.
  6. To prevent overspending.
  7. Helps to reduce financial anxiety.
  8. To plan for emergencies.

 

How Do I Budget?

There are so many different approaches to budgeting, however the prominent budgeting rule of the moment is the “Minimalist Budget,” or the 50-30-20 rule. Basically, it says:

  • You should spend 50% or less on Needs (food, shelter, warmth, and minimum payments on debts).
  • You should spend 30% or less on Wants (defined as something that you can give up with only minor inconvenience).
  • You should spend at least 20% on Debts & Repayments, including any extra payments on debts and your established savings plan.

 

What About My Problem Areas?

Now that you’ve tracked your spending and decided to create a budget, we need to look at the problem areas of the budget. What are your problematic spending habits? Most people struggle with one or more of the following problems:
Common Spending Problem Areas
 

Living Outside Your Means

Living outside of your means is when you spend more money than you make monthly. This includes, but is not limited to: buying a car you cannot afford (think brand new), buying a way-too-expensive or way-too-big house (being “house poor”), carrying a credit card balance month-to-month, not saving any money on a monthly basis, you have more than one late bill or any late bills consistently, etc.
If you want to get out of debt, you have to stop adding more to your pile. You have to develop a plan of action to cut your spending and get your finances back on track. Write down how much you bring in (income) and how much you spend (expenses). If you subtract your expenses from your income and get a negative number, you’re in trouble. You need to find every possible way to cut your budget down until that number is a positive number.

 

Spending Next Month’s Income

Spending next month’s income is the practice of borrowing from your future, such as buying something on a credit card and paying it off with your next paycheck. If you cannot afford to pay for it with cash now, don’t buy it with next month’s income. All you’re doing is setting yourself up for failure.
The best way to help this sort of practice is to create a waiting list (or wait-to-buy list), and an emergency fund. Most people struggle the most with spending next month’s income when they experience an emergency and aren’t financially prepared to handle it.
 

The Importance of an Emergency Fund

An emergency fund is a saved pot of money to help handle unexpected expenses such as major car repairs, home repairs, medical bills, and more. The purpose of an emergency fund is to help you prepare for a crisis, prevent you from borrowing from yourself, and to help you out in an emergency.
Most experts recommend one of the following amounts for your emergency fund:

  • $1,000
  • 3 months expenses
  • 6 months expenses

Now it might be difficult to start creating an emergency fund in the beginning. The key to building an emergency fund is consistent contribution. Even if you can only contribute $5 per paycheck, stick to that plan. Over time, that fund will grow. Every little bit helps. Just be consistent in your contributions and your definition of emergency (new shoes are not an emergency).
 

Emotional Spending

Emotions play a significant role in your everyday life, including how we make decisions.  Often times, people find themselves in a cycle of spending money with the purpose of making themselves feel better, also known as emotional spending. Even though we know it doesn’t actually help, we continue to do it because we haven’t found a better solution. So how do you fix emotional spending?
There are basically 3 steps to overcoming emotional spending:

  1. Acknowledge your history of emotional spending.
  2. Hold yourself accountable for your purchases.
  3. Find a substitute for your emotional spending. You’re more likely to be successful if you have a replacement than if you attempt to take it away without nothing else to supplement.

 

Everyday Choices

Every day we make choices. Many of our choices seem small and insignificant, like stopping at a convenience store to purchase a soda. Other choices are more significant, like purchasing a new home or car, or even starting a new job. Around 60-70% of the choices you make on a daily basis are financial choices. What choices do you make on a daily basis? Do you choose to spend money mindlessly or to spend and save intentionally?
 

Great. Now How do I Create the Plan?

Creating a Debt Repayment Plan is a surprisingly simple process at this point. You’ll need to gather your total debt, your monthly income, and your monthly budget. Next, you will need to determine exactly how you will approach your debt. The two most common approaches are the Snowball Method and the Avalanche Method.
 
The Snowball Method orders your debt by total amount owed, smallest to largest. Pay the minimum payment on all debts except the smallest total debt. The goal is to throw as much money as possible at that smallest debt until it is gone. Then, you take the money you were paying on the smallest debt and apply it to the next smallest debt. Continue this until all debts are gone.
 
The primary benefit of the snowball method is you show more progress initially. The primary cost of this method is you’ll likely end up paying more overall.
 
The Avalanche Method orders your debt from highest interest rate to lowest interest rate. Focus all your extra money at paying off the debt with the highest interest rate, then apply that monthly amount towards your next highest interest rate debt. Continue this approach until all debts are gone.
 
The primary benefit of the avalanche method is that you will save money. The primary cost of this method is it may take a longer period of time to show progress.


After you’ve figured out which way you want to go about managing your debt, it’s time to look at your budget. Where can you cut down your spending to allow for more money to go towards paying off your debt. Ask yourself the hard questions.
 
Do you really need cable/satellite TV? Do you really need a fancy TV? Do you really need that new car with the high payment? Do you really need to spend $900 a month on food? Will I be happier blowing money now or being out of debt sooner?
Do I Really Need Printable
If you’re struggling with those questions, try rewording them.
 
Is having cable now worth being in debt for another 2-to-4 years? Is having a fancy TV worth being in debt for another 2 years? Is having a new car worth ADDING 5 years to my being in debt? Are my particular food choices supporting my goal of being debt-free as soon as possible? Will I be happier blowing money now or being out of debt sooner?

Is It Worth Printable

Chances are you can answer no to just about every single one of those questions (even if you didn’t). When it comes to debt, it ultimately comes down to if your current choices are worth being in debt longer and/or if your current purchases are truly needs or simply wants you place a lot of value on.
 
Whatever number you come up with after you cut out any unnecessary spending you’re willing to part with, you’ll have your extra monthly payment amount. My husband and I pay an extra $725 on our debt every month. Some months we can put more towards our debt, but we never put less than $725 towards our debt. We didn’t start out with this number. Over time, we added to our monthly extra as we got more comfortable with spending less.
 
Your debt repayment plan is not meant to be stagnant. You are welcome to change your extra monthly amount as time goes on as your life circumstances change. Just remember: no matter how small, every extra bit helps.
 
Adding just $5 extra per month can cut the life of your $100,000 mortgage down by 2 months.
 

When Will I Be Done?

Now that we have established our numbers, it’s time to determine our original and modified payoff dates.
 
To calculate your original payoff date, simply download this spreadsheet and enter in your information with no monthly extra (“snowball”). Next, select snowball, avalanche, or other as your desired method. The chart at the bottom of the page with list your payoff dates for all the debts you listed. The last listed debt shows your final date of debt (your original payoff date).
Debt Repayment Calculator Original Date
To calculate your modified payoff date, simply enter your total monthly payments (minimums + extra) into the box.
Debt Repayment Calculator Modified Date
I’ve included several different images that show both the first page as well as a second page of the spreadsheet, reflecting how extra payments can make an impact, as well as the difference in this particular example vary by method (snowball vs. avalanche).

Snowball Example

Snowball MinimumSnowball Extra 240 Snowball Extra 250
 

Avalanche Example

Avalanche MinimumAvalanche Extra 240 Avalanche Extra 250
 
As you play around with your calculator, you’ll be able to see the difference of how adding any amount to your monthly payment will decrease your interest and time throughout the duration of your debt. Honestly, this is probably one of my top 3 hobbies (because I’m a giant personal finance nerd on a mission).
 
Now with this information, get pumped! You can see how your payments will make an impact over time! Keep your eye on the prize! If you need to, please return to the previous step to recalculate your budget even further.
 

What Should I Do With Extra Money?

Another common question that arises with debt is how and when to apply additional payments. The answer is simple: NOW.
 
I made the mistake of setting a goal for myself to add a lump sum to my debt at the end of the year without actually doing the math. Instead of waiting until the end of the year, I can apply smaller amounts throughout the year with an even greater impact.
 
If you receive a raise, I encourage you to use the additional money to work on paying off debt with a larger monthly contribution rather than rushing out to make a purchase that may add to your overall debt.
 
The absolute best practice for paying off debts is to always pay more than the minimum payment, and add any extra money you can as it comes along. If you can’t pay extra on a monthly basis, that’s alright. Any extra payment you make will reduce the life of and total interest on your loans.
 
If you’re doing a personal challenge to apply as much as possible to a debt, be sure to pay as you go because it will make a difference.
 

What Happens If I Screw Up?

So this whole process of creating a debt repayment plan is a giant thought and behavior shift. Because you are trying to change both your thinking about debt and your behaviors, it’s pretty likely you’re going to slip up at some point. Don’t freak out, and don’t give up.
 

Focus on why you decided to make this change in the first place. Focus on what is important to you.

 
You may need to change some piece of your debt repayment plan. You may have started out with too ambitious of a goal and need to lower it for a few months. You might have simply forgotten. It’s okay.
 

Find a different way to succeed.

 
If you need to, create a visual reminder of your goal and what you need to do monthly. Create a visual tracker of your debt. Reward yourself for following through for a specified amount of time. Find a friend or family member to help hold you accountable to your goal. Practice saying “no” to expensive social outings.
 
Whatever you do, don’t give up. The debt repayment plan isn’t forever set it stone. It can be modified to keep you motivated, focused, and engaged.
 

You can do this. I believe in you.

 

Have you created a debt repayment plan before?

2 thoughts on “The Complete Guide to Creating A Debt Repayment Plan

  1. Great information about something that is so hard! Have you ever used Mint for budgeting? I highly recommend it and am personally a little neurotically obsessed with it. It automatically tracks all of your spending and assigns categories. You can also set goals and spending limits – it’s super helpful and has really helped me with financial planning.

    1. I actually use Mint! I don’t use it for budgeting because I’ve tried about 15 times and always end up forgetting to check-in and update everything for months at a time. I have to go the paper-and-pencil route. Mint is definitely a great tool, though! I use it to have a general overview of my finances at any given time. That is exceptionally nice since I use 3 different banks with regularity.

Leave a Reply

Your email address will not be published. Required fields are marked *