Posted by Income Taxes and Bookkeeping LLC

Budgeting Tools to Help You Get Out of Debt

Budgeting Tools to Help You Get Out of Debt

Keeping personal debt under control is important for achieving financial goals, like a comfortable pension. More debt means more money invested in interest payments instead of your savings account. If you find that you're paying off your debt every month, but your balance doesn't seem to be moving, you might want to review your payment strategy. Here are some budgeting tips to help you move forward:

Plan your debt

Not all debt affects your finances in the same way. To find out what has the most impact on your budget, gather recent statements from all your creditors. List your creditor, amount owed, monthly payment, and interest rate on your accounts. Knowing which debts have the lowest monthly payments and interest rates will help you determine which debt is costing you the most.

Prioritize your payments

One strategy that can help you reduce your debt faster is to pay off your minimum debt every month, especially the one with the highest rate. On this debt, pay as much as possible. Once this debt is eliminated, move on to the next debt with the highest interest rate, paying more than the minimum. Continue with this process until you have paid off all of your debts. This can save you money on interest payments, and those savings can help you pay off that debt faster. To maximize the amount of money you can save on interest payments, take a closer look at your monthly budget to see where you can cut back and invest that money in your debt. You might be surprised how quickly your debts begin to reduce.

Consolidate Your Debts

If you have multiple debts, consider consolidating your debts or combining all your debts into one loan. This can allow you to pay off your debt in one monthly payment, often much less than all previous monthly payments combined. Depending on your payment strategy, you might end up paying off that consolidation loan over a long period of time, so see how those extended payments will affect your financial plan.

Once you've figured out the best way to pay off your debt, you can think about how much debt you can comfortably pay off. This can help you weigh your options and make smart financial decisions for the future.

Choose a debt repayment strategy.

It makes sense to pay off the higher interest debt first in most cases. Another option is to focus on the lowest debt. This method often helps motivate you and gives you the momentum you need for your debt elimination plan.

This might be something to consider if you don't already have enough savings to serve as an emergency fund or if the tax exemption on a retirement plan is greater than the interest paid on the loan.

Here is a summary of each strategy to help increase your payment speed:

  • Debt Avalanche: You first pay your debt with the highest interest rate (while you pay the minimum on the others), then the next higher interest rate, and so on. You can save time and money while paying off your debt.

  • Debt consolidation: Combine older debts with new debts, ideally at a lower interest rate, making it easier to manage payments or shorten payment terms. There are numerous ways to consolidate debt, including personal loans and balance transfer cards.

  • Debt Management Plan: If you're facing a huge debt of credit cards and little progress, an expert in credit management can set up a debt management plan to lower your rate interest and introduce it into a payment plan.

  • Snowball Debt: Focus on paying the lowest debt first (while paying the minimum for the others), then transfer the amount you pay in installments to the next highest debt.

Final Words

Unless you win a lottery, eliminating debt will likely take some time, so you must monitor your monthly plan. Consider using the budgeting tools listed above to see how you pay off debt even faster. If you are uncertain, try consulting a professional to help you plan on specific methods to help you get out of debt faster.



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