Debt Repayment System

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There is one big financial goal in our lives right now: pay off my student loans. It is the only debt we have, and we are getting rid of it. Here’s the debt repayment system we use to track our finances and pay off our debt.

debt repayment system

You need a budget

In order to pay off any debt, the first thing you need to know is how much extra money you have each month to put toward debt. I use a free online program to track my budget. All of our accounts (bank accounts, credit cards, retirement accounts) feed into it, and I’m able to edit and categorize any expenses. I’ve been doing this for years.

There are many ways to create and track a budget, though. You can do it all on paper, or through an off-line program. The important thing is to know where your money is going. I suggest you track your budget for at least a month (if you are not doing so already) so you can see how your money flows. Make sure you include any expenses charged to credit cards into your budget, not just what you pay from your checking or savings account. Also include any cash amounts paid–this means you will need to hold onto your receipts and possibly label them so you don’t forget what they were for.

Some of the reasons you need a budget first:

  • You may be paying out more money than you make each month, putting yourself into further debt.
  • You may be overpaying on certain items and not realize it because the amounts are auto-debited from an account.
  • There may be auto-renewing subscriptions to things you don’t use anymore.

If you haven’t been tracking your budget, seeing it all in black and white may be a real eye-opener. You may think you know what you’re spending, but until you’ve analyzed it you don’t know for sure.

Reduce expenses wherever possible

While you’re paying off debt, are there things that you can cut back on in order to reach your goals? Here are some simple ideas:

  • Do your manicure at home instead of paying someone else to do it every week.
  • Bring your home-made coffee to work instead of buying it at the local coffee shop.
  • Pack lunches instead of eating out.
  • Don’t renew your magazine or newspaper subscription.
  • Re-negotiate your cable TV bill.
  • Talk to your car insurance, renter’s insurance or homeowner’s insurance carrier about any discounts you may be missing out on.
  • Stop buying fast food and junk food (this will be better for your waistline, too).
  • Think about getting your loved ones simple, handmade gifts instead of expensive presents from the store.
  • Stop buying new clothes or shoes.
  • If you don’t go to the gym, cancel your membership.
  • If you have credit card debt or other loans, talk to your credit company about ways to reduce the interest rate on any existing balances.

Now that you’ve created a budget, you may have information that looks something like this:

debt repayment system

**By the way, if you don’t want to set up your own budget spreadsheet I will have a template for you at the end of this post.**

Make sure you put all of your expenses on your list, including any required minimum payments for debts you owe. Then add them all up and list your total expenses.

I have net income (what comes to you after taxes) listed on the top left of my spreadsheet in bold. To make them stand out, I also bolded the debts and total expenses (this isn’t my personal information, by the way. It’s just an example).

What’s left over?

Take your total expenses and subtract it from your net income. This amount is what you have available to pay off debt.

debt repayment system

Do you have any savings?

Now that you know how much it costs you to live every month, do you have an emergency fund to pay those expenses if you unexpectedly lose your income? Dave Ramsey, the finance guru, recommends having a $1000 emergency savings account in place before paying off debt. In my opinion that is way too low. I decided I was comfortable with the following set-up:

  • We have three accounts, all at the same bank.
  • One is a checking account.
  • We have one savings account linked to our debit card. It has a small balance in it to cover accidental over-withdrawals from the checking account and in case we need quick access to some extra cash not found in savings.
  • Our second savings account is not linked to our debit card. This is our larger, longer-term savings account. It is not linked because if someone hacks our debit card information they could steal all our money. This account is what I consider my emergency savings, and it holds 3 months’ worth of living expenses.

All of our regular expenses come from our checking account. We use our credit card only when we have a large purchase. For example, we recently had a large bill at the RV repair shop. We charged it to our card. The balance isn’t due until mid-March, but I’ve already paid off almost half of it by sending my credit card company money every week. This allows me to keep money in our accounts in case we need it but still pay the bill off before it collects any interest. I’ve said this before, but I’ll say it again: we do not charge anything to a credit card unless we already have the money for it in our accounts. The only exception would be a major emergency, such as medical expenses or an RV repair that needed to be taken care of immediately.

Do you need a savings account?

The savings idea is optional, but recommended. 3-6 months of living expenses would be a good place to start. Another thing to think about is if you have experience losing your job before and you know that it’s hard to find another one. How long did it take before you were back at work? If it was a long time, you may want to set even more money aside.

However, if you’re on the other end of the spectrum, and you have more money in savings than you need for your emergency fund, consider putting the balance immediately toward your debt. Think about how much interest that money is earning you in your account versus how much interest you are being charged on your debt. It will usually save your more money to delete the debt than keep it in savings.

Name your debt

Now it’s time for the fun stuff. List each debt as of the current date with the debt source (such as credit card) and the current balance. I recommend including the interest rate in there as well. List them in order of smallest amount to largest.

Off to the side, list your minimum payment for each debt. You should pay all your minimum payments for all debt each month, and those amounts remain in your total monthly expenses.

Of an important note: some creditors, such as student loan companies, may start listing your minimum payment as zero once you pay more than the minimum. Don’t let this fool you. You still owe that minimum balance every month. If you do not pay it, the interest will continue to accrue. To get the most accurate amount, find out your minimum payment before you start paying off your debt.

Use the debt repayment plan to start eliminating your debt

Next, you are going to calculate how long it is going to take to pay off your debt. Next to each debt, take your total balance and divide it by your total “leftover” amount that you have to spend. Or, you can just use the spreadsheet I have linked at the bottom of the page. Here’s an example:

debt repayment plan

The plan is to pay off the smallest debt first by putting all your extra money toward it. Once the first debt is paid off, delete that minimum payment from your total expenses. That money then gets allotted to your “leftover” amount to go toward the next debt.

This method is not a new concept, nor does it belong to me. It’s called debt snowballing it’s very effective. Why re-invent the wheel when a good technique already exists?

Track your progress

As you pay off the debt, I recommend updating your balance sheet at least once per month. You will want to update your remaining balance so you know how much more time you need to pay off a balance.

Also, if you see a debt expected to be paid off in one month and three months later you still haven’t paid it off, do a reality check.  Did you forget about expenses? Did you have an unexpected cost? Are you not sticking to your budget?

The only way this is going to work is if you are honest with yourself about your income, expenses and debt.

Make debt repayment a priority

By referring back to your accounting each month, it also acts as a motivator. It’s fun to see those balances go down! I also use it to remind myself that this is the top priority for me. Spending money on frivolous things will have to wait, because this debt is hanging over my head like a lead balloon. I want it gone, preferably by the end of the year.

To help  you with your goals, I’ve included a link to the sample spreadsheet you see above. It’s view-only on the link, but you should be able to save a copy to your computer and edit it as you wish.

Sample information is filled out so you can see how it looks. If you click on any of the boxes with calculations, you will see a formula that generates the calculations. Please feel free to contact me if you have any questions about how the spreadsheet works or how to modify it.

Click here for the spreadsheet!

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