How to Create Your Own Debt Repayment Plan

Ever had that sick feeling in your gut because your finances are in disarray? You’re in debt. A lot of it. It feels like you’re going to be in debt forever. The bills keep coming in, endlessly. You never have enough money for anything you want in life. The dream of a full debt pay off seems completely unreachable.

If this sounds like you, then you probably need a debt repayment plan.

What’s a debt repayment plan?

A debt repayment plan is an ordered listing of all of your debts, along with a dollar amount you’re committing each month to paying those debts off. That dollar amount must be higher than the total minimum payment on all of your debts and should be as high as you can reasonably afford each month. Each month, you make minimum payments on each of the debts, then use the remaining money in your debt payoff pool to make a big extra payment on the top debt on the list. When it’s gone, you cross that top debt off and keep going.

[Read: Best Debt Settlement Companies for 2020]

The most efficient way of organizing debts is by interest rate, with the highest rate at the top and the lowest rate at the bottom of the list. That strategy gets you to full debt payoff with the smallest total dollar amount invested. Another strategy is to organize your debts by balance, with the smallest debt at the top of the list. This strategy gets you to your first debt payoff the fastest, giving you a taste of success quickly. For most people, the two strategies wind up with pretty similar lists, as the largest debts people have — like mortgage rates — usually also have the lowest interest rates.

Advantages of a debt repayment plan

First advantage of a debt repayment plan is that you have a set amount that’s going toward debt each month. Whatever amount you decide you’re committing to debt repayment each month is the amount you can budget for. Doing this makes your finances a lot easier to manage.

Second, if you follow the order of the plan, you’re paying off debts in a very sensible way that minimizes the total amount you’ll owe. Paying off higher interest rate debts first means that you’re paying less overall in interest.

For people struggling to figure out how to repay debts and how to budget such a plan, those advantages are a game-changer.

How to create your debt repayment plan

1. Make a list of your debts

This part’s easy. Simply go through all of your debts and make a big list of them. Use a blank sheet of paper, a Google Doc or whatever works best for you. For each debt, include a description of the debt, like “mortgage” or “Chase credit card,” the balance of the debt, the interest rate and the current minimum monthly payment.

You can get all of that information from your most recent statement or from the original documentation for the debt. If you can’t find that information, just contact your lender.

2. Minimize the interest rate on each debt

The next step is to go through each of those debts and seek to minimize that interest rate. For example, you might look into consolidating your student loans and locking in a lower interest rate on them. You might consider refinancing your home loans. You might consider doing a balance transfer on your credit cards, provided that it actually lowers the interest rate.

[Read: Best Refinance Mortgage Companies of 2020]

If you end up moving a debt to another offer with a lower interest rate, don’t focus on the lower introductory rate. The rate that matters is the rate that you will eventually have to pay if you don’t pay it off. If you transfer your balance to a credit card with a 0% introductory rate for a year and then a 33% rate, consider that offer to have a 33% rate. Go through this process for each debt. Focus on moves you can make that will lower the interest rate on that debt. Most of the time, that will lower your monthly payment as well, but prioritize the interest rate.

3. Organize

Once you’ve reduced the interest rate on each debt as much as possible, organize those debts. You’ll want to reorder your list of debts in some sensible fashion. The best method is to organize them by interest rate, with the highest rate at the top of the list. This will result in you paying the lowest possible total amount, though it may mean that it takes a while to pay off the first debt.

Another popular method, known as the “debt snowball” method, is to organize debts by their balance, with the smallest balance at the top. This gets you to the point where you’re paying off the first debt as fast as possible, giving you that sweet taste of debt repayment success.

4. Calculate how much you can afford to put toward the plan each month

Now, add up the minimum payments on all the debts. That’s what you’ll need to contribute to debt repayment at the absolute minimum. You won’t pay them off quickly at that rate, but you will pay them off.

Then, figure out how much extra you can reasonably commit to each month for debt repayment in total, which should be higher than that total minimum payment. If your debt payments add up to $1,500, try to aim for $2,000 a month. If they add up to $700, aim for $1,000 a month.

Going forward, you’ll be able to firmly budget each month for the amount you chose. That money comes off the top.

5. Pay it down

This is the good part. The final step is to start wiping out those debts. Make minimum payments on all the debts on your list out of the amount you’ve pledged to debt repayment. Take what’s left and apply it as an extra payment to the top debt on your list. When the top debt is paid off, just cross it off and keep going.

This does not mean you should lower the amount you have budgeted for debt repayment. That should stay the same as you pay off debts, which will mean that your extra payments become larger and larger as you pay off more and more debts. Eventually, you’ll be making a huge extra payment on your final debt and thus paying it off incredibly quickly.

As you do this, do your best to avoid adding more debt to the equation. Avoid using credit cards. Save up for your next car rather than relying on financing. Be patient.

Example of a debt repayment plan

Let’s say you have five outstanding debts.

  • A mortgage with a balance of $150,000, a monthly payment of $1,000, and an interest rate of 4%.
  • A car loan with a balance of $20,000, a monthly payment of $400, and an interest rate of 5%.
  • You have a credit card (Card A) with a balance of $6,000, a monthly payment of $100, and an interest rate of 20%.
  • You have another credit card (Card B) with a balance of $4,000, a monthly payment of $75, and an interest rate of 25%.
  • You have one more credit card (Card C) with a balance of $5,000, a monthly payment of $100, and an interest rate of 33%.

The first thing you’d do is total up your debt payments — they add up to $1,675 a month. You decide you can commit to putting $2,000 per month toward your debts while also committing to not putting any more expenses on those credit cards.

[More: 4 Ways to Avoid Paying Interest on Credit Card Debt]

If you use the most efficient method, your debt repayment plan would look like this:

  1. Credit card C: 33% interest, minimum payment $100
  2. Credit card B: 25% interest, minimum payment $75
  3. Credit card A: 20% interest, minimum payment $100
  4. Car loan: 5% interest, minimum payment $400
  5. Mortgage: 4% interest, minimum payment $1,000

Each month, you make a minimum payment on each of those debts out of that pool of $2,000. This leaves you with $325 leftover. You apply that $325 as an extra payment on Credit Card C. After several months, you pay off Credit Card C. You cross off the top line on your debt repayment plan, and now it looks like this:

  1. Credit Card B: 25% interest, minimum payment $75
  2. Credit Card A: 20% interest, minimum payment $100
  3. Car loan: 5% interest, minimum payment $400
  4. Mortgage: 4% interest, minimum payment $1,000

You make minimum payments on those four debts, but you now have $425 leftover for an extra payment, which now goes toward Credit Card B. When that one’s paid off in a few months, you cross it off, and your new, now larger extra payment goes toward Credit Card A. Soon, you’re throwing $2,000 a month at your mortgage.

Too long, didn’t read?

A debt repayment plan is simply an organized list of your debts. By simply making a minimum payment on all of your debts and the largest extra payment you can muster on the debt at the top of the list each month, you’ll make efficient progress towards paying off all your debts. This will bring you to debt freedom faster than you ever thought possible.

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Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.