By Sterling Xie
Paying off debt is difficult in itself as it requires opening another section in your monthly budget to account for it. However, these steps could make that process just a little easier.
Step One: Creating a Budget
Though it sounds trivial, creating a budget is the foundational step to determining how much you can spend based on other, conditional expenses after setting aside the amount of money needed to pay off debts. To do this, make a list of all your expenditures (including food, utilities, gym memberships, debts, auto/home loans, property/income taxes, savings, etc.) and all your assets (house(s), car(s), income, etc.). Using a spreadsheet or calculator, calculate your disposable income each month—subtract your net expenditures from your net income. This indicates the amount of excess money you have to spend each month.
Step Two: Budget Restructuring
Double-check your budget and make sure that it has a savings fund and an emergency fund. The savings fund is used to save for long-term financial or family goals you might have like buying big assets (houses, cars, etc.), whereas the emergency fund is a rainy day fund in case you lose your job or face financial hardship. Then, try to cut unnecessary expenditures in order to increase your monthly disposable income. Make sure you have created another category in your budget to account for debt and loans.
Step Three: Debt Repayment Plan
The best way to pay off debt is generally accepted to be a graduated debt repayment plan. The graduated debt repayment plan is a stepped plan, meaning the proportion of your debt you pay increases as you age. That has proven effective when you know you likely will make more money in the future (which is the case with most people). This is generally used more often for younger people that anticipate salary growth. For example, if you have just graduated from college with perhaps a student loan, you would want to pay less, to begin with as you would only have your starting job’s salary. You would likely anticipate that it increases with promotions and better-paying jobs.
The other option is a fixed debt repayment rate, where you pay the same amount every month with interest. If you have a stable income where you are able to pay the debt off easily or you know that you likely will not have significant increases in your income in the future, this plan could be more suitable.
We hope that these three steps have simplified your debt-repayment journey and we wish you the best of luck in such endeavors!