5 Steps to Creating a Debt Repayment Plan

Written by Aqleema Anwar

Being debt-free is a choice yes, a choice, that is available to every single person, regardless of the amount of their debt. So if it’s a choice, why wouldn’t everyone want to strive for a debt-free future? Well, although it’s possible, it’s not always easy. Thinking it’s going to take up to 10 or 20 years or even that only a decision like filing for bankruptcy can help are the mindset blocks that keep people from acting on that dream to be debt-free. Shame, regret, feeling frozen, stress - these are all valid feelings that keep people stuck in the debt cycle, when they could be working on reducing their debt. What’s going to unstuck you? A debt repayment plan.

There are two types of debt repayment plans; snowball and avalanche. With the Debt Avalanche Plan, you pay off the debt with the highest interest rate first. The Avalanche method allows you to tackle the one that is costing you the most to carry. Once that’s paid off, you move onto the next highest and so on. The Snowball method works opposite, in that you focus on paying off the smallest balance first, once you pay that off, it builds the momentum for you to pay off the next one. Much like its namesake, it may start off small but once it starts rolling, the payment impact starts getting bigger and bigger.

Regardless of which method you choose, the 5 steps of a debt repayment plan are very similar:

Step One: Listing Your Debts

It’s important to be honest with yourself about ALL of the debts you have, regardless of how small the amount owing. For the Avalanche method, it’s important to list your debts based on the highest interest rate, for the Snowball method, list them based on the smallest balance.

Step Two: Minimum Payments

It’s important to know what your minimum payment is for each debt you have listed in step one. While you are working on paying off the debt (highest interest or smallest balance), the remaining debt still needs to be paid off. By paying off the minimums, you are able to put any extra money towards the debt you're currently working on.

Step Three: Decide on an (Attainable) Target Debt-free Date

I emphasize attainability because it’s easy to get excited about this process and come up with a random date that might be 2 years away. But if that is not attainable, you’re just setting yourself up for failure. A plan is created for success, not failure. So pick a date that is actually achievable. Don’t know which date works for you? No problem, Step Four will help you with that.

Step Four: Calculate The Numbers

Based on the date you selected in Step Three, calculate how much you would have to pay towards your debt monthly to meet that target debt-free date. If, based on your calculations, you can pay off all of your debt in two years, perfect! If based on your calculations, there is a gross deficit between your current financial situation and how much you would have to pay towards your debt, this is where you need to reevaluate your debt-free date.

Step Five: It’s ok to Edit

This step is about taking a look at steps three and four to see if you’re either being over ambitious (and setting yourself up for failure) or if you’re living in a scarcity mindset and not putting as much effort into reducing your debt faster.

Outlined are the five steps to create a debt repayment plan but it’s up to you to decide which option, avalanche or snowball, is best for you. There are different viewpoints on both but both plans achieve the same result which is for you to become debt free. Decide which plan feels more aligning and most importantly will keep you motivated during the process. And most importantly, pick the one you will stick with.