Learning how to prioritize your debt is a beginning step to formulating your debt payoff strategy. Having a plan to pay off your debt is the key to success. Having a plan (and sticking to it) will allow you to pay off your debts faster, easier, and with a lot less stress!
The first step in setting up your payoff plan is to prioritize your debt. Do you know how much debt you have in total? Do you know how long it will take you to become debt-free if you only pay the minimum balances? How about how much extra you’ll pay in interest charges? These are essential facts that you need to know. You need to know them to stay in control of your finances, and to become the rockstar money managing machine you’ve always wanted to be!
How to prioritize your debt:
Prioritize Your Debt | Step One:
Lay it all out in front of you. Take all of your debts and spread them out across the kitchen table. Each debt gets its own separate sheet of paper – OR index card.
- Write who you owe the money to. If it is one of many student loans right the loan number next to the company name. Example: Sallie Mae 01-45
- How much you owe (The balance)
- Write down the interest rate
- If you are past due you need to flag it. Use a highlighter – post-it note or sticker to indicate at a glance that you are past due on this debt.
Prioritize Your Debt | Step Two:
Organize it! Start moving the sheets of paper around. Start by laying them out in order from the smallest balance to the largest balance. Paying off your debts in this order is called the Debt Snowball Method. It is where you pay the smallest balance first, and then once that is paid you roll the monthly payment into the next smallest debt so that you are paying that minimum payment plus the minimum payment from the first debt.
When you organize it from the highest balance to the smallest balance it is called the Debt Avalanche Method. It has the same thoughts as the debt snowball, but you pay the highest balance first (Which will take the longest) and then roll that money into the next highest.
I, however, recommend the debt snowball method because it allows you to get a lot of “wins” early on, which really does help you to stay motivated throughout the process.
Prioritize Your Debt | Step Three:
Now that you have your debts laid out in the order that you will be paying them. Pull out any high stress … keeps you awake at night debts (Past due, extremely high interest rates, wage being garnished). Those debts you will pay off first! Pay those off to lift the burden, then begin paying down the debts in the order in which you laid them out.
Prioritize Your Debt | Step Four:
Stay motivated. This is key. You can have the best-laid plans, but if you do not work them, you’ll be in the same if not worse position next year! I use my Financial Planner as a way to keep us motivated and informed on our finances all year long. I have been doing a Google Spreadsheet of our budget to help keep the motivation IN ADDITION to adding the debt-free motivational coloring pages to my financial planner. By adding the spreadsheet and the debtfreecharts, I have been able to ramp up our motivation – and even increase our debt payoff monthly amount.
Find your motivation – when you inevitably lose it, find a new source!! You are the only one who can do this. Make no excuses – just make a change.