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Debt Free Step Three: Your Debt Management Plan

To get out of debt, you need a plan. But pick a plan that is too aggressive and you may not be able to keep up. Learn how to choose a plan that will actually work.

Nobody can get out of debt without the right debt management plan. Pick a plan that is too aggressive and you may not be able to keep up; go with a “too affordable” plan and you won’t get out of debt as fast as you should. One the flip side, if you are too aggressive with your debt management plan and put too much money to debt each month you may not have enough left over for necessities or emergency expenses. That can lead to new charges on your credit cards, negating your hard work.

The third step in my Debt Free in Seven Steps system takes some effort, but will provide you with a road map to your journey out of debt.

Step Three: Create a detailed debt management plan using a snowball calculator to determine exactly how much you will pay towards your debts each month.

Determine your debt pay-off budget

Assuming you already have a good monthly budget, you know how much you have left over (or how much you’re going into debt) each month. If you have no money left over after paying all of your living expenses and the minimum payments on your credit cards, you need more than a debt management plan.

You will need to cut your expenses or increase your income. If you are already living as frugally as possible, getting a second job is the most immediate way to secure additional income. (Nobody said getting out of debt was easy). You may also want to consider working with a debt management company like CareOne Debt Consolidation that can negotiate with your creditors to reduce the amount you owe each month.

Once you have taken steps to ensure your monthly income exceeds your monthly expenses, it is a good idea to leave yourself a 10% buffer between your budgeted monthly expenses and the money you plan to put towards your debt. This 10% is not “discretionary money” to spend as you choose, rather a cushion in case you have an unexpected car repair or higher-than-normal utility bill. If you make it through the month without spending it, that money should also go towards your debt.

Create a snowball plan

Once you have established your budget (plus 10%) the remaining balance is the money you’re going to put towards your debt. Now it’s time to use a snowball calculator. Website What’s The Cost has a free and easy-to-use debt snowball calculator.

Enter your account balances, interest rates, minimum payments, and monthly amount you can afford, and you will have your debt free dates. You can play with the monthly amount you want put towards your debt and can easily see how drastically it effects the interest you will pay.

For example, if you have a $10,000 credit card balance with a 14.99% interest rate and pay $200 a month it will take you six and half years and cost you $5,465.00 in interest. Double the amount you pay each month to $400 and you will pay the debt off in just two and a half years and pay $1,884.00 in interest.

Go to Step Four

Once you figured out what your monthly debt payment and have allocated that money in the most efficient way using a snowball calculator, it’s time to see if you can find any shortcuts to getting out of debt. Move onto Step Four: Ways to Negotiate, Consolidate, Eliminate Debt. Or, see all steps in my Debt Free in Seven Steps system.

Published or updated on May 30, 2006

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


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