Developing a debt repayment plan is extremely important part of becoming debt-free. The repayment plan is your guide to how much money you will put towards your debt(s) on a monthly basis.
What is a debt repayment plan?
A debt repayment plan is an action plan for how you will tackle your debt and attain your ultimate goal of being debt free. This is everything from the total of all your debts to the order you will pay off your debts in to the amount of month you contribute to repayment monthly.
I know a few people that are working towards become debt free because they feel the pressure and anxiety of being in debt. They are not comfortable being in debt. Unfortunately, many people have not addressed their debt situation and are ignoring the severity of it all.
Having a debt repayment plan is like making sure you are prepared for a vacation: you’ve packed all your stuff, you have a map, a GPS, and everything else you need. You could just start driving in the general direction, but you’re almost guaranteed to waste time, money, energy, and other resources.
Having a debt repayment plan saves you money
It allows you to see how to order your debts and find ways to reduce your overall interest payments. If you arbitrarily pick a debt (or worse, just pay the minimum on everything), you will waste money on interest. If you take the time to develop a repayment plan, you will know how to pay off your debts to pay the least amount of interest possible, ultimately saving you money.
Having a debt repayment plan will save you time
If you take the time to create a plan of how best to approach your debt, you will come up with a monthly minimum you can contribute to your debt. 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).
Even adding an extra $20 a month will make a difference. You can also look at alternative time frames, such as paying half the monthly total twice a month (or even bi-weekly), which will reduce the life of the loan (especially if it’s simple interest).
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 alter the amount of time it will take you to pay everything off. In addition, it allows to calculate your debt-free date (and reduce the time for the originally calculated date).
Having a debt repayment plan helps to keep you motivated
Nothing keeps me motivated like looking for ways to move up my debt-free date. As I’ve mentioned before, I use this spreadsheet to track my progress towards becoming debt-free. Several times a month, I look at how adding additional payments affects my debt-free date.
Not to mention I feel much better able to tackle my massive debt by having a plan. Sometimes it feels overwhelming, but I just focus on the plan I’ve developed and I continue to focus on the end goal: being debt-free and moving forward with my life goals.
Having a debt repayment plan helps you to alter and trim your budget (which you definitely have)
When I first developed my debt repayment plan, one of the first things I did was look for ways to trim my budget to allow for extra money to apply towards my debts. It also helped me to prioritize my spending. I definitely would rather apply an extra $500 towards my debts than take a vacation right now. Mind you, I am a bit of an oddball when it comes to this sort of thing. This doesn’t mean I don’t allow myself to have fun or have any discretionary funding; it just means I evaluate all my purchases on some level. For example, I have Netflix, Hulu, and Amazon Prime but I have never had cable.
Now that we have why the debt repayment plan is important, stay tuned for my next post in the series: How to Calculate Your Debt-Free Date.