UPDATED: April 21, 2022
No one enjoys being in debt. Making monthly payments to lenders is painful, especially when you're still years from paying off your loans. But a well-crafted debt repayment plan can make your monthly payments less stressful and help you see the light at the end of the seemingly never ending tunnel of debt. That's why it's important to start paying off debt immediately.
What is a Debt Repayment Plan?
A debt repayment plan allows you to organize your finances to create a structured plan of attack for paying off your debts in the most efficient manner.
A solid debt repayment plan can not only help you save money over the long run, but also help you manage your ability to take on new (hopefully smarter) debt in the future.
Creating Your Plan
Follow the below steps to create a money-saving debt repayment plan.
Get Organized
If you haven't before, it's time now to create a list of all of your outstanding debts. This includes loans, credit cards, and that $50 you owe to the neighbor who walks your dog.
The comprehensive list will consist of not only the amount you owe but the associated interest rate and minimum monthly payment for each. You'll know the list is complete by verifying that if everything on your paper were wiped away by a magic genie, you'd be completely debt-free.
Below is an example of an organized list with all the necessary information.
| Debt | Balance Due | Interest Rate | Minimum Monthly Payment |
| Credit Card #1 | $4,600 | 21% | $45 |
| Credit Card #2 | $525 | 19% | $25 |
| Student Loans | $12,445.50 | 3.4% | $80 |
| Mortgage | $132,980 | 3.2% | $750 |
| Personal Loan | $5,400 | 12% | $179 |
Consolidation
If your debts are massively overwhelming or all with very high interest rates, it could be beneficial to first consolidate debts before starting repayment. Debt consolidation means moving multiple debt sources into one loan, often at a lower interest rate, to make repayment simpler and less expensive.
Commonly used consolidation methods include taking out a personal loan or moving credit card balances using a balance transfer. You'll want to be cautious with either of these approaches and make sure you fully understand the associated fees and timeline for payoff before you commit.
You should also be wary of introductory offers that promise a 0% APR. Often people fail to pay off debt during the introductory period and are saddled with higher interest rates than they were paying originally.
Figure Out your Strategy
There are two primary strategies for paying down debt.
The debt snowball is a strategy where you begin repayment with the smallest amount of debt first. Once that amount is paid, you'll then lump what you were paying on that debt into the second smallest debt on the list until it's paid and so on until you have a fairly large combined amount paying down your largest debt until it's gone.
As popularized by Dave Ramsey, this strategy rests on the fact that paying off your smallest debt quickly will keep your motivation strong.
The debt avalanche is a debt pay down strategy where you'll first attack your highest-interest debt. By paying off the highest interest first, it creates the maximum savings on interest payments. Paying down debt this way can encourage someone who is driven by seeing those higher-interest payments fall off the monthly expenses first.
Step 6 of The Proper Cents Path to Financial Freedom covers these strategies paying off your debt for good. You can find it here.
Prioritize Debts
If you've chosen to do the debt snowball, you'll want to order your debts based on the amount due with the smallest balance at the top. Then you start to pay off your debt immediately. The chart below is an example of the snowball approach in action.
| Debt | Balance Due | Interest Rate | Minimum Monthly Payment |
| Credit Card #2 | $525 | 19% | $25 |
| Credit Card #1 | $4,600 | 21% | $45 |
| Personal Loan | $5,400 | 12% | $179 |
| Student Loans | $12,445.50 | 3.4% | $80 |
| Mortgage | $132,980 | 3.2% | $750 |
If debt avalanche is your choice, categorize your debts based on the interest rate with the highest rate at the top.
What Can You Afford to Pay?
Now that you're organized and know the strategy you'll use to pay down the debt; it's time to figure out how much you can afford to pay.
You should assume that you'll need to pay at least the minimum payment on each debt. Use this opportunity to figure out how much extra you can contribute to the first debt to pay it down as quickly as possible. If you don't have one yet, create a budget so you can supercharge your debt pay off.
The total amount due for all minimum monthly payments from our example above is $1,079. A commitment of $1,400 per month means each debt will receive a payment of the minimum balance, while the first and smallest debt will receive an extra $321. Given the size of the smallest debt, that means it can be paid off in only two months.
Once the first debt is paid off (and you celebrate accordingly), the $25 minimum monthly payment, plus the remaining amount of $321, will be applied to the second debt until it's paid.
As you can see, it doesn't take long to see progress using this strategy.
Stick to the Plan
It's essential to make sure you set aside the necessary funds to pay off your debts each month. But more importantly, you must commit to not increasing any of the debts during the pay down period.
Trying to pay off a balance that keeps increasing can be extremely frustrating and will likely lead to giving up on using the debt repayment plan altogether.
The feeling of paying off a debt is like arriving at the summit of a mountain and realizing there's a whole new world out there ahead of you to conquer. A reliable debt repayment plan can help make sure you get there. You just have to be willing to do the hard work.
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