Creating a Plan to Repay Your Debt: A Step-by-Step Guide

Dealing with debt can be a daunting task, but developing a plan to pay it off can alleviate the stress. According to the Australian Bureau of Statistics, household debt in Australia is increasing, with the average household owing over $260,000 in 2021. If you are struggling with debt, here are some tips and strategies to help you create a debt repayment plan.

Step 1 - Create a budget

The first step in creating a debt repayment plan is to create a budget. This will allow you to understand where your money is going and identify areas where you can reduce expenses. Make a list of all your income and expenses, including bills, rent or mortgage payments, groceries, and any other costs. Once you have a clear understanding of your finances, you can begin to identify areas where you can save money.

Step 2 - Prioritise high-interest debts

It is important to prioritize debts with the highest interest rates if you have multiple debts. These debts accumulate the most interest charges, so paying them off first will save you money in the long run. Make minimum payments on all of your debts and allocate any extra funds towards the debt with the highest interest rate.

Step 3 - Automate your repayments where possible

Automating your debt payments can ensure that you do not miss any payments and incur late fees. Set up automatic payments for the minimum payments on all of your debts and add additional payments as you can afford them. This will help you stay on track with your debt repayment plan.

Step 4 - Which strategy suits you best for the repayment of debt

here are different debt repayment methods, such as the snowball and avalanche methods. The snowball method involves paying off the smallest debt first, while the avalanche method involves paying off the debt with the highest interest rate first. Choose the method that works best for your situation and stick to it.

Case Study

A case study can be used to demonstrate the benefits of creating a debt repayment plan. For instance, Peter has $10,000 in credit card debt with an interest rate of 20%, and \is only making minimum payments of $200 per month. In contrast, John has also accumulated $10,000 in credit card debt but has created a debt repayment plan. He is making minimum payments of $200 per month and putting an additional $200 per month towards his debt. John is using the avalanche method and has prioritized the credit card with the highest interest rate of 25%.

After one year, Peter will still have $8,360 in credit card debt and will have paid $1,440 in interest charges. In comparison, John will have paid off $4,800 of his debt and will have saved $1,200 in interest charges.

Creating a debt repayment plan can significantly improve your financial situation. By creating a budget, prioritizing high-interest debt, automating payments, and choosing a repayment strategy, you can take control of your debt and work towards becoming debt-free. Consider seeking assistance from a financial adviser if you need help creating a debt repayment plan. They can provide guidance and support throughout the process.

Why not take the next step and talk to a qualified financial planner?

LifeTime Financial Group are specialist (holding appropriate accreditations) advisors who are ideally positioned to assist you in planning your estate needs.

If you would like to discuss your concerns about a recession or your wider financial planning needs, why not call us today on 03 9596-7733? There is no cost or obligation for our initial conversation/meeting.

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