Setting Up A Debt Elimination Plan For Beginners

Are you a beginner to getting out of debt?  A lot of people are, in fact when I worked in financial services many people had no idea what it took to get out of debt.  They didn’t know how to structure a debt elimination plan or what it took to stay focused on getting debt free once and for all.

So today I’m going to give you the tools and the advice you need to get started with your own debt elimination plan.  These two things however will only get you half way though, the other 50% has to come from you, to stay focused enough to stay on track and accomplish your goals.

So are you ready?

UMMM… I can’t hear you, ARE YOU READY!

The Tools You Will Need

Great, lets get started.  The first thing you will need are the proper tools to get started and keep track of you or your plan.  To get started all you will need to do is download the Debt Snowball Worksheet.

Once downloaded you will have to extract the file, and once that is done you can open any one of the four Exel files inside.  Once it’s open it should look something like the picture below.

Add Your Debts

Now that you have the tools we need to add the debts to the program.  If you look at the picture above you will notice I have some sample debts already in place.  Simply do as it says and add your creditors name, the current balance, the interest rate you are paying and the current payment you are making.  As for the custom column leave that blank for now.

Before we go on their is one thing you should know, if you are adding a credit card, the rate and payment can change from time to time but for now just add the current rate and the minimum payment.  If you pay extra on your credit cards that’s great but to make this plan effective you will want to keep all of your payments to the minimum.

Add Your Extra Monthly Payment

Now you need to add the amount of money you are willing to put towards paying off your debts every month.  I recommend at least a $100 or more.    This money will be applied to your first debt, usually with the lowest balance.  Their are some other options but I will discuss them in more detail in the next section.

Now, I know what your thinking where am I going to come up with a $100 at?  For starters look at your own budget.  If you were applying extra money towards your credit cards before you can use that money.

For example if you have a credit card with a $3000 balance and the payment is $100 and you’re paying $50 extra every month, you can use that money for the extra payment you need to pay down your debt.

You should also consider putting a budget together as well if you haven’t done so already.  This will help you identify were you may be able to cut some frivolous spending habits, and if that don’t work you may want to look into getting a part time job.  I knew a guy once who took up a paper route just so he could have some extra money to pay down his debt.

Choose Your Strategy

Next, in the course of setting up your debt elimination program we need to choose a strategy that will best suit your situation.  Below I will discuss each option.

• Snowball ( Lowest Balance First) The first option is to pay the lowest balance debt first.  I recommend this route first  for one big reason, doing this will allow you to see results much more quickly.  This can go a long way when your just getting started.
• Avalanche ( Highest Interest Paid First) The next method is the avalanche method which pays down your debt with the highest interest rate first.  This plan is designed to save you tons of money on interest payments.  If you want to see how much interest this will save you can compare it against the snowball plan.
• Customize Your Own Plan Next you can even customize your debt elimination plans to pay down your debt in the order you want to pay them off in.  To do this just back up to the beginning to the column that says custom.  Here you can enter the order of of how you want to pay off your debts.  For example maybe you would prefer to pay down a certain credit card over another one.  This is were the customize tool comes in handy.
• No Snowball Finally, you can choose to see what would happen if you did nothing at all.  This strategy is not really an option to consider but rather to show you the difference between doing nothing or running the snowball plan.   In fact in the example I have above if I were to do nothing I would pay over $30,000 extra in interest payments compared to the snowball plan.  As you can see this would make a huge difference.

The Snowball Growth Chart

Finally, you will see the growth chart which will give you a visual picture of how your debts will be paid off.  In the chart below the green represents the amount of money increasing and being applied to each debt by the plan while the red line shows the interest being paid down.

An Important Warning

An important note I should add is that what ever money you do apply to your plan you must keep adding that money up to the next debt once you get the first debt paid off in order to make your plan work effectively.

For example, lets say you have a monthly debt payment of $200 and you are adding an extra $100 to help pay the debt down faster.  Once you have this debt paid off you will apply the extra $200 plus the $100 towards the next debt.

Failing to do this will only delay the process.

Review Your Payment Schedule

Last but not least you will want to check out your payment schedule which you can find marked at the bottom of the page.  In the example below you will be able to see how many months it took to pay off the debt, the month it will be paid off, and how much interest you paid on the debt.

Questions???

Of all the debt elimination advice I’ve giving out you’re certainly going to have a few questions.  If so feel free to leave a comment.  This may all look a bit tough at first so take your time with it at first and play around with it.

I also suggest once you have your debt elimination plan worked up that you print it out and post it somewhere you can see it often.  I like to put mine on the fridge but anywhere will work.  Reviewing your plan often will keep you focused on your goals to the end.

Good Luck

This post was recently featured on The Carnival Of Personal Finance by Simply Forties.

Tagged as: debt elimination, debt elimination advice, Debt Elimination Plan, debt elimination plans, debt elimination program