How to Start a Budget for Paying Back & Repairing Debt

Paying down debt can liberate you financially.
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If you find yourself overwhelmed by debt, avoiding phone calls from creditors and tearing up payment notices from lenders, you are not alone. However, you do have options that begin with taking charge of your finances. Some people feel intimidated when looking at the total quantity of debt they owe, but dedicating regular payments toward debt has a dramatic effect on the big number. Creating a payoff plan, and sticking to it, will help you pay off your debt and repair your credit rating. Then you can focus on creating and meeting savings goals.

Step 1

Face financial facts. You need to know how deep you are in the hole before you can dig yourself out. Gather your bills, credit card statements and other financial records. Total what you owe to whom.

Step 2

Divide up your debt by urgency. Typically, high-interest credit cards, some types of real estate loans, some car loans and personal loans carry the highest interest rates. Zero in on the debt that carries the most interest and penalties.

Step 3

Go after the bad guys. If you have high-interest credit card debt, you may first want to see if you can transfer the debt to a new credit card with an introductory 0 percent rate for 6 months to a year. That will help you make payments without triggering more interest.

Step 4

Budget your income and expenses so you make paying off debt a priority. Create a list of all income, including interest, bonuses and gifts. Do the same thing with expenses, making sure to allow for small amounts of miscellaneous cash spending, sometimes known as an adult allowance, but reigning in spontaneous spending and retail shopping.

Step 5

Dedicate the rest of your disposable income toward paying down the worst of your debt. In addition, set aside enough money to make minimum payments on all other debt. You need to make sure you do not trigger any penalties as you pay down your debt.

Step 6

Automate your plan. Pay off as much as possible every month and, once your highest-interest debt is paid, move to the next one. Continue this process until you have paid off all debt and can begin dedicating this same quantity toward savings goals.

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