Here’s How To Prioritize Paying Debt

Debt can look like a long insurmountable mountain when the payments begin to add up. Having debt can be frustrating since you want to set aside your income for other goals, but instead have to tackle these obligations. With limited resources, it’s understandable why many suffer from poor debt management. You’ll need a personalized plan that aims to tackle paying bills.

Many people don’t know where to begin when creating a plan to manage their debt. It can get overwhelming, especially if you’re managing several accounts and debt pools. The good news is that there is a way for you to craft something reliable that will lead you to freedom from debt. All you need are some strategies and a carefully crafted plan.

Organizing Debt

The first thing you need to do when planning is to know all the information about your active debts. Many fall into the trap of late fees and missed payments because they aren’t aware of data like due dates or the minimum required payments. They may also know it at first but can easily forget it without organization. When listing out your debts, make sure you’re aware of all the following information:

• Due dates

• Interest rates

• Minimum monthly payment

• Remaining balance

Knowing the due date is vital as you’ll ensure that you lower the chance of missing out on payments. The balance and interest rates are also crucial because they will fit into your payment strategy. Lastly, you also want to know the minimum payment.

The minimum payment is essential because you’ll need to fulfill that amount monthly. Your income has a minimum commitment, and you have to find extra to go over that to begin paying off debts. You don’t have to overpay for each loan, but you’ll have to start somewhere.

Getting this information is easy as you’ll see it in your mail statements. You can also access them online through the lender’s website. If they aren’t accessible, contacting your lender will let you know the details.

Find a Payment Strategy

Setting a payment strategy for your plan will give you direction. It also ensures that each payment provides the maximum impact in reducing debt. You’ll know what to focus on first and can start tackling your debt.

Here are two methods that will help you pay off debt. Remember that while you may prefer one of these methods over the other, it may not necessarily work for you. It all depends on what your debt situation is at the moment. Considering your finances, choose one of these two main methods:

Higher Interest Focused

A higher interest-focused repayment plan is as the name implies. You’re looking at all of the debts you have and organizing them by interest rate. From there, focus on paying the highest one first. These types of debts tend to cost you more money the longer you keep them alive.

As you begin hitting the interest of these debts, you’ll notice that you need to pay less each month. Lowering the principal lowers the interest rate, freeing up more money. You can then use that extra money to pay the debt off further, snowballing the effect. Alternatively, you can also allocate the money to other needs.

Paying off the high-interest debt first does not mean you neglect the others. You still have to pay the minimum from each to keep them level while you put your extra on the highest one. After you’ve paid that off, move on to the next item until you complete the list.

Smallest Balance Focused

Another effective strategy is the smallest balance-focused strategy. As you organize all your debts, arrange them based on the amount you need to pay instead of the interest rates. Like the previous strategy, you’ll have to pay the minimum for all debts while mainly focusing on one.

Begin by focusing on the debt with the smallest balance. For example, if your credit card debt is the lowest, you pay that off first and eliminate it from the list. You effectively take away one balance and interest rate by shaving off these small debts. Doing this prevents the rates from compounding and getting a hold on your finances.

Once you finish off the smallest balance, you move on to the next smallest while maintaining the minimum payments on the others. The strategy also snowballs as the money you were using to pay off one frees up, and you can use it to pay for the next. It means that you’ll have more money and pay off your debts much faster. It builds momentum, and it’s a strategy that many recommend. You also build confidence, since you see your hard work paying off as you eliminate each debt payment.

Priorities

There are some exceptions to the rule in any plan. One of the main exceptions is debts that have rapidly approaching due dates. Some examples of these types of debt include court judgment debts, child support, and taxes. You have to settle these right away. Regardless of the method that you’re using, these debts should automatically move to the top of your list.

One option is to list these priority debts separately and make sure they have space in your budget. If you don’t have enough income to overpay for your other loans, prioritize completing these first.

What Should I Choose?

There is no right or wrong with each method, and it’s mostly a matter of preference. Some may feel like one may work better over the other because of their circumstances. The most crucial part is choosing one and sticking to it. Commit to becoming debt free.

Once you’re debt free, you have the freedom to use your money however you want. Instead of stressing over monthly payments, you get to decide on your financial goals and pursue them.  Reaching your other financial goals becomes easy. You’ll be able to save money, invest, and spend more with less worry. You’ll have less money tied to obligations and feel incredible peace of mind.

If unsure, you may want to try one first and see if it’s working for you. Sometimes you’ll have to spend one or two months making the payments to see the motivation. If you feel like it isn’t working, then switch to the other method. It doesn’t have to stay the same early on, as long as you’re whittling away the debt.

Budgeting Your Payments

Now that you know how to start tackling your debt, the next question is how will you get the extra money to start paying them?

It may feel like you’re barely getting by while only paying the minimum monthly payment. How are you going to dedicate even more money to your debts?

The answer is to budget. This is a way to plan out your spending every month to make sure you know where your income is going. Instead of looking at your bank account and wondering where your money went, you can plan it out in advance and have control over your finances. Integrate your debt payments into your budget and prioritize them.

If you’ve never budgeted before, it’s simpler than it seems. Start with your essentials. These include your rent, utilities, food, gas, taxes, and other strictly necessary payments. Include your debt in this category, since it is your top priority right now — at this step in the budget, only include the minimum monthly payment.

Once you have the amounts for your essentials listed out, move on to the entertainment category. This category includes non-essential items, hobbies, going out to eat, and experiences. This is the area of your budget that most people overspend in — especially while they’re in debt. Instead of using their excess money to pay off their debt payments, they’re going on vacations and going out to lunch every day. Intentionally analyze this area of your budget and cut down as much as you can. Give yourself some money to enjoy, but be realistic about how many subscriptions you really need or how many times you should be going out to eat in a week.

The final category is your long-term savings and investments. This is an important category to prioritize, but while you’re paying off debt is not the best time to invest. Use that extra money to quickly pay off your debts so you don’t have to pay as much in interest over a longer period.

Organizing your money like this also lets you know if there’s room to adjust. If you end up saving money in a category, you can use that extra money to pay off your debt even faster. Ideally, you want to be in a position where you understand the maximum money you can spend to pay off debts. For example, if you can give an extra 10% of your total income aside from your minimum payments, you’ll be on your goal. You’ll have to consider where you can make cuts to make more room for the extra repayment money.

Using Small Windfalls

Apart from your budget, you should also use unexpected money as an opportunity. Use them no matter how small, as each dollar you add to your payment will hit the debt principal. You should take each opportunity where you’ve saved money as a means to pay the debt. Some examples include:

• Picking up money on the road

• Someone paying off a small debt you’ve forgotten

• Receiving money from relatives

• Getting a bonus at work

Found money is the most common term and does not factor into your budget. If you want to eliminate debt fast, using it can be one of the ways you can accelerate your goals.

Extra Work

Another way to fulfill debt repayment fast is by looking for additional work. You can take an extra hour and use the earnings from that hour to help pay off your loans. An alternative is to look for part-time jobs or freelance opportunities — you can put the extra money straight into debt repayment.

If you don’t work on the typical 9-5 schedule, you may want to take a different route. For example, if you’re a freelancer on commission-based work, you may want to consider putting a percentage from every project towards your payments.

The small amounts you’re getting by doing this may seem insignificant. But just like interest rates, savings also compound quickly if you keep at it. Paying an extra $20 weekly means adding $80 to your debt payment every month. That’s nearly $4,000 off your loans within a year!

By paying often, you’re getting a more objective view of progress. It will feel like you’re making a mark each time you give payments because you’re doing it frequently.

Debt Consolidation

If you’ve been continuously paying debt on time and have a good credit standing, consolidation may be an option. Debt consolidation combines all your debt into a singular account. From then on, you only need to make payments on one debt, reducing the stress and mental load required to manage multiple payments.

You’re essentially applying for a new loan for this agreement. The lender will pay off all the other initial loans for you. The money they use then becomes a part of a new balance.

Why would you want to pursue debt consolidation? If you have a good credit standing, then it may mean that you can enter into better repayment terms. For example, you can get lower interest rates, only needing to deal with one due date. It increases focus, but it is not for everyone.

It all depends on the conditions of your other debts. For example, check for other fees if you want to pay off your mortgage immediately through consolidation. Some debts may have additional fees if you’re paying them off.

The Bottom Line

Paying off debt can be a stressful experience. However, with knowledge and a plan, you can start making dents in your debt each month. You don’t have to stay in a financially insecure situation. Use what you’ve learned here as the compass that guides you in the right direction.

Remember that you still have to make minimum payments no matter what plan you implement as part of your debt management. There also might be emergency debts you need to pay off first before focusing on the other long-standing ones.

You can get financial freedom earlier with a proper budget and some means to make extra money. It doesn’t happen overnight, but consistency is key. Start today and intentionally pay off your debts every month, and before you know it, you’ll be financially free!