Borrow Debt

The Ultimate Debt Pay-Off Plan For 2021 

Kim Porter  |  January 27, 2021

We get it. Debt happens. Here’s your game plan for paying it down, and finally getting back on track with saving. 

As we enter 2021, the average credit card balance stands at $5,313. If you’re just making minimum payments because the coronavirus took a wrecking ball to your finances, we get it. But many of the consumer-relief measures that made it possible to financially survive 2020 are bound to change or expire at some point. When they do, you’ll need a plan for paying off your debt. 

“The biggest challenge I hear from our clients is that it seemed impossible when they started their debt-free journey,” says Thomas Nitzsche, spokesman for Money Management International, a nonprofit credit counseling agency. “But by committing to a plan and sticking to it, they were able to find success.”

While your debt might feel overwhelming, the best thing to do is dig in. Here’s how to set up your own ultimate debt pay-off plan.

1. Take an inventory of your debts

Before you come up with a pay-off strategy, you need to organize the details of all your debts in one place. Create a spreadsheet and list your credit cards, student loans, car loans, personal loans, mortgage and any other debts. Include these details for each account:

  • Balance
  • Due date for the monthly bill
  • Interest rate
  • Minimum monthly payment
  • Contact information for the lender
  • Introductory rate or deferments and their expiration dates
  • Your payment method, such as auto pay 

2. Choose a debt pay-off strategy

Next, you’ll choose a debt pay-off strategy and rank the debts in the order you want to pay them off. Depending on your preference, you may use some variation of these methods: 

  • Pay off small balances first. This is the “snowball method” because (like a snowball rolling down a hill) you start small and gain momentum over time. Pay off the smallest balance first, and move one by one into the larger balances until everything is paid off.
  • Pay off high-interest debt first. Known as the “debt avalanche” method, you would pay off the account with the highest APR first, then move down according to the interest rate. 

“I’m a big fan of the debt avalanche (method) because you minimize your total lifetime interest costs,” says Justin Pritchard, a fee-only financial adviser and founder of Approach Financial. “The debt snowball is great for building momentum and it feels good—so use that if you’re lacking motivation.” 

3. Go over your budget

Here’s where you’ll go over your budget to figure out three numbers:

How much you spend on bills: In the same spreadsheet you listed your accounts, make a list of your monthly bills. These include your minimum debt payments but also things like utilities, internet, cable, cellphone bill, groceries, and transportation. Let’s say your bills amount to $2,000 per month. 

How much you earn: Go over your pay stubs from the last three months to figure out how much you earn in a typical month. Let’s say you earn $3,000 after taxes.

How much extra you can direct toward debt pay-off each month: Subtract your bills from your income to see how much you have left: $3,000 – $2,000 = $1,000

4. Make a goal

Goals can be a powerful motivator, but simply stating “I will pay off my debt” is just the start. Creating a “SMART” goal—one that’s specific, measurable, achievable, relevant and time-bound—can help you get there. For example, a SMART goal might look something like this: 

“I want to pay down $10,000 in debt (specific) using $1,000 a month to pay it down (measurable and relevant). I can do this by paying the minimum on all my bills and using the leftover money toward the debt (achievable). I’ll commit to doing this over the next three months and will re-evaluate in April. By the end of 2021, this debt will be paid off (time-bound).” 

5. Get to work

Put the extra money—in our example, that’s $1,000—toward your first debt, while paying the minimum on all other payments. This allows you to pay off the debt more quickly because the money goes toward the principal and less on interest. If you instead spread the money over several debts, it has less of an impact. 

While you pay down your balances, you’ll need to live within your means so you’re not creating more debt. That might mean making changes. If you’re not already tracking how you spend money, take a look at your last few credit card statements. Where is most of your discretionary money going? Based on your spending habits, figure out where you can cut back. Maybe you should dine out less, cut out the expensive hair treatments or unsubscribe from multiple streaming services. 

If you want to take it up a notch…

Once you start paying down some of your debts—as long as you’re not increasing your debt balances or applying for new credit—then your utilization ratio should drop. As a result, your credit score will likely improve.

It’s a good time to try and lower the interest rates on your debt. More of your payments will go toward the principal, which speeds up your debt pay-off timeline. Here are some methods you can use to get a lower interest rate:

  • For a credit card: Call your credit card issuer and ask for a reduced APR. If you’re a customer in good standing, most credit card issuers will lower your interest rate a few points just for asking, Nitzsche says. 
  • For multiple credit accounts. If you have several types of high-interest debts but you have the credit score and income to qualify for a lower rate, then a credit card balance transfer or a debt consolidation loan could be a good move. 
  • For a mortgage: Mortgage rates are at all-time lows. If you can qualify for a lower interest rate, you don’t mind paying closing costs and you plan to stay in your home for a while, then mortgage refinancing could help you save money. 
  • For a student loan: Depending on the type of loan you have, you may be able to enroll in income-based repayment plans or refinance the debt.

If you need ideas for earning money…

If your salary just barely covers your bills, then it’s time to find extra income to put toward your debt. 

“Extra income” doesn’t have to mean getting a side hustle or working more hours (although these strategies can also work). Consider renting out your home, selling your stuff, or trying other income-boosting tricks. And if you receive a windfall—hello, stimulus checks and tax refunds—then use it to pay down some of your debt. 

But one method should be off-limits: “Don’t be tempted to tap retirement savings to create more income,” Nitzsche says. “This comes with tax implications and long-term savings setbacks.”

If you stumble along the way…

It’s also important to accept there will be setbacks during your debt pay-off journey. For example, surprise expenses may cause you to use your credit cards one month. To avoid these issues, create a small emergency fund to cover at least one month’s worth of your expenses. This can help cover unexpected costs while you pay down your debt. 

Accountability helps, too. “You can stay motivated by plugging into an online community of others working to achieve the same goal,” Nitzsche says. “Some clients also find that using a tracking app or spreadsheet helps keep them focused, organized and motivated.”

Know when to get help

If your bills are way overdue but you’re barely keeping up with your housing payment, then you might be in “survival” mode.  

At this point, consider getting professional financial help. Reach out to your creditors and ask them about hardship plans or extending these benefits if you’re already enrolled. You can also check out the National Foundation for Credit Counseling, where a certified credit counselor can review your finances. They’ll help you find solutions such as a debt management plan. 

What’s important is that you do something about your debt instead of ignoring it. “If all goes well, you’ll make a plan and watch it unfold nicely,” Pritchard says. “But if that doesn’t happen, there may not be anything you can do about that. By making smart choices with the information you have available now, you’re doing the best you can. So start there.”

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