Budgeting for Debt Repayment

Debt repayment is a crucial aspect of financial management that can significantly impact your overall financial health.

Effectively managing and repaying debt helps you reduce financial stress, save money on interest, and improve your credit score.

Here’s a simple guide to debt repayment:

Step 1: Identify all debts

To plan for your debt repayment in your budget, you need to identify all your debts.

Debts include loans, credit cards, past due taxes, and any loans from family or friends.

If you aren’t sure of all your debts, you can pull your credit report from any of the major credit bureaus (Experian, Equifax, or TransUnion). You are allowed one free report from each bureau a year.

List out the debt source, debt amount, interest rate, minimum payment, and due date.

Step 2: Choose a repayment strategy

You will want to budget the minimum payment each month to avoid any late fees or excess interest charges.

Ideally, the goal is to eliminate any consumer debt, with priority given to credit credits and unsecured loans, then secured loans such as a car loan.

There are two common repayment strategies: the avalanche method and the snowball method.

Avalanche Method

The avalanche method prioritizes paying off debts according to the interest rate.

List all debts from largest interest rate to smallest interest rate. Pay off the debts with the higher interest rate first.

This method aims to minimize the interest you pay on your loans.

It can be discouraging though if your higher interest rate debts are larger debts and you aren’t seeing much progress month to month.

Snowball Method

The snowball method prioritizes paying off debts according to the balance.

List all debts from smallest balance to largest balance. Pay off the debts with the lower balance first.

This method aims to tap into the emotional side of finances. By paying off the smaller balances you will see debt accounts eliminated faster.

It will be easier to see the progress month to month to hopefully give you motivation to continue prioritizing debt repayment.

Step 3: Budget for your debt payments

Once you decide which debts to prioritize, add the payments to your budget.

Make sure that you have the minimum payments for all debts first, then add the additional payments to the debt you prioritize.

To begin with, consider focusing on paying down one debt rather than multiple debts at once.