Debt Elimination Plan

Getting out of debt can feel overwhelming, but with the right repayment plan it’s possible to pay down high balances, start saving money, and reach your financial goals.

A debt elimination plan gives you a good grasp of your finances while setting actionable repayment targets. Although paying off your debt won’t happen overnight, a good repayment plan can help you stay both motivated and committed to improving your finances.

Here’s how you can create a debt elimination plan and get back on track with your budget. The first step in a debt elimination plan is to make a list of all of your debts. If you know all of your credit card and loan accounts, write or type them out.

If you don’t know all of your debt accounts, one easy way to identify them is to use a credit monitoring platform to get your credit report. You can get a free credit report from AnnualCreditReport.com. This kind of service typically shows you your active debt accounts and the balances on those accounts. Keep in mind, though, that medical debt might not show up on your credit report. 

Once you have your list compiled, put each account into a spreadsheet along with the account’s current balance, credit limit, and minimum monthly payment. You may also want to include the interest rate and payment status (i.e., whether the account is in good standing or behind).

Now it’s time to take a close look at your spending habits. This is the first step in developing your budget—the next step in your debt elimination plan—because it allows you to see how much you’re actually spending each month, rather than what you think you’re spending.

You’ll want to go through your bank and credit card statements for the past month or two and calculate how much you’ve spent in each category.

During this process, you might find some categories where you’re spending more than you thought. For instance, you might think you only spend about $200 on dining out each month, but after tracking your spending, you find that this number is closer to $600. Be sure to note any category where you want to rein in your spending.

With your spending habits identified, you’re ready to create your budget. A basic budget shows two things: how much you’ve spent and how much you’ve earned. The goal is to end each month with more money coming in than going out.

There are several different budgeting methods to consider, such as the 50/30/20 method, a zero-based budget, and the envelope system.

Allocate 50 per cent of your income to needs (e.g., debt payoff, rent, groceries, insurance), 30 per cent to wants (e.g., dining out, vacations, hobbies), and 20 per cent to savings. Dividing up your spending into needs and wants can help you prioritize your spending. “Once you know the numbers, you can allocate toward those needs and wants and reduce the debt that works the least for you or causes the most financial pain,” New York-based financial attorney Leslie H. Tayne told The Balance. 

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