Creating a budget will help you figure out how much money you have to pay down your debts, while also covering your needs and obligations. Knowing what you owe on a monthly basis, and where you actually spend your money, can help you prioritize so you can pay your bills on time, get control of your debt, and start saving for the future.
2. Track your spending
Once you have a budget in place, it becomes easier to find areas where you can cut back on spending. Track your spending for a week, and compare it to your budget on a regular basis. Are you actually spending more—or less—than you originally planned? Adjust your budget as needed to make sure you still have money left over to pay off debt.
There are two basic ways to reduce your debt: the snowball method and the highest interest rate method.
With the snowball method, you focus on getting rid of your smallest debt first and work your way up to paying off larger debts. This can be a great motivator—you may see progress quickly—but you may pay more in the long run as more costly debts continue to add up.
Highest interest rate method
With the highest interest rate method, you prioritize paying off the debt with the highest interest rate first. While this approach can save you money in the long run, you may not feel like you’re making progress quickly, especially with large debts.
It’s important to weigh the pros and cons of each debt reduction strategy and find the one that works best for you.
4. Work with debt collectors to pay off your debt
If you have an account that has fallen into collections, you can use your budget or cash flow tool as a starting point for negotiating a repayment agreement with debt collectors.
First, get more information about the debt, including:
- name of the creditor
- amount owed
- who to contact if you need to dispute the debt
Next, be honest with yourself about how much you can pay each month, and decide on the total amount you’re willing to pay to settle the entire debt. When you talk to the debt collector, explain your situation and your plan. Make sure to record the agreement in writing with the debt collector before making a payment.
Keep in mind: If you have more than one debt with a debt collector, you can direct the debt collector to apply any payment you make to the debt you choose.
5. Consider working with a credit counselor
A reputable credit counseling organization can advise you on your money and debts, help you with a budget, and offer money management workshops. Here is a resource that can help you find a credit counselor that fits your needs as you work to pay off debts.
6. Acknowledge your accomplishments
After paying down the balance on one of your outstanding accounts, make sure you take some time to celebrate your accomplishments and take a look back at your situation and how you have improved.