Are you looking to get out of debt? Here’s the ultimate guide to your debt repayment plan. If you’re one of those people who take a loan to pay for another loan, this is for you. A debt repayment plan will help keep you motivated as you will be able to track and see your progress. Once you make a debt repayment plan you will be surprised at how fast you will repay your debts.
Here are the steps you can follow to come up with a debt repayment plan.
List All Your Debts
Before you can even come up with a debt repayment plan, come up with a list of all your debts. From personal bank loans, student loans, microloans like mshwari, mortgage, credit cards, and even money you owe to friends and family. This list will give you a perspective of how much debt you’re really in. You can use google sheets to make this list. Have a column with the amount you borrowed, interest rate, minimum monthly payment, how much you’ve paid, and how much you owe. If you don’t have this information, you can always contact your lender.
Go through each loan and assess them. Identify the loans where you can take advantage of the interest rates by increasing your monthly payment rate.
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Rank Your Debts
After making a list of all your debts you want to rank your debts in the order in which you want to pay them off. You can also use the debt snowball method to list them. This is where you rank your debt based on the balance, start by listing the one with the lowest balance at the top. This way you’re motivated to keep paying it as you will finish repaying it faster. If you order them by interest rate, start with the highest interest rate at the top of the list. This ensures you pay the lowest possible amount however it might take time to clear your debts. Whichever method you choose, make sure it works for you.
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Payment per month
Assess how much you should be paying per month. Based on the list of all loans and debts you have what is the minimum payment per month? This will show you how much money you should assign to your debt repayment plan per month. Once you have an amount of how much you should be paying per month you can slot it in your budget.
If you have any extra money remaining don’t buy that new shoe you’ve been eyeing, dedicate it to repaying your debts. If you can make more than the minimum payment per month, go for it. Research if you can make your payments early because for some personal bank loans you have to pay an extra fee if you make extra payments.
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Manage your expenses
When you’re trying to repay your debt you have to manage your expenses well. Adopt a frugal lifestyle. Make sure you can account for the money that leaves your wallet or bank account. This way you will know what you’re spending your money on and you will determine how you allocate your budget. Slash your expenses to your requirements and wants. If you only go to the gym once a week, stop paying for your membership.
Side hustle
When coming up with a debt repayment plan you need to assess how much extra income you have to repay your debt. You may need to cut back on your expenses and review your spending patterns. You may want to start a side hustle so as to generate some extra income. Use any extra money you get to repay your debt. Depending on how busy your schedule is you can start a side hustle that will eventually create passive income for you i.e. a Youtube channel or an eCommerce website. This way you will not strain when repaying your debt as you will have extra sources of income.
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Bank and debt statements
If you’re one of the people who don’t check their bank account or Mpesa balances you need to change. Make a habit of checking your bank account balance and your debt statements. You might also want to confirm that there are no inaccuracies in your debt statements. The statements will also motivate you after seeing how much you’ve paid off and how much you have left to pay.
Build Up Your Savings
Focus on building up a savings account so as to avoid getting stuck in debt in the future. Make sure you have emergency savings account for emergencies. Even before your paycheck hits your account make sure you have planned for every single coin. If there’s any cash left over you can put it in your savings account.
Review your bank’s or credit card’s policies about extra payments and principal payments on a loan. This will help you get the most out of your extra payments each month. Some banks will charge you an extra payment fee.2 If you understand how they charge, you will be able to work out a strategy that will help you apply the majority of the money to your principal each month.
Manage your expectations
Accept the fact that repaying your debt takes time and can have an emotional rollercoaster effect. You might get anxious and frustrated over time. Understand that the process takes time and might become overwhelming at times.
Motivation & Support system
Celebrate all your wins no matter how small. Think about how your life will be after repaying all your debts. Treat yourself to something simple everytime you finish repaying a debt. This way you will be motivated to finish repaying. If you feel overwhelmed, you can always turn to your friends and family for a shoulder to lean on.