When my peers come in as clients they almost always have some form of debt. The largest is usually student debt from college. Some clients don’t have a functional budget or knowledge around their debts. Once we create a plan together, they start to see the potential for their future and realize that with the help of a plan they can be debt free and on their way to achieving their goals and building wealth. So let’s talk about what a debt management plan looks like.
Understand the Terms of Your Loan and What You Owe
Before you even start planning you need to educate yourself on a few things. The first is having a good understanding of the terms of your loan. Student loans have a wide range of repayment options and maybe some people think these are the only plans. They are but it doesn’t mean you can’t pay more than the monthly payment on your statement.
The second item one needs to understand is what you owe. What is your current balance of your loan? What is the interest rate of the loan? How much is the monthly payment? These are all important to create your plan to conquer debt.
What is your number?
This is where having a budget comes into play. Budgeting helps you goal plan, debt plan and create a savings plan. It’s the foundation. To figure out the extra principal payment amount you can apply towards your debt you need to do a serious cash flow analysis. What has to be paid? Then the question becomes, what can I live without? We all purchase items we don’t need, whether it is eating out, clothes, home décor, an expensive gym membership or Starbucks. What can you sacrifice to find the number you are willing to use for extra principal payments? An extra $50, $100 or $400 per month paying off your student debt can tremendously help.
Create a debt payment account
This is similar to creating a separate account for your emergency fund. Open an account that has no fees and use this account to place that extra student debt money in. This way you’re never tempted to use it. Create an automatic withdrawal from your main checking into this account.
Start your debt snowball
Now comes the fun part. Start a debt snowball. There are many resources to educate you on creating one. My goal is to help you understand the importance of it. Say you have three loans each with a $100 minimum payment which adds up to $300 per month. By adding in an extra $100 to the first loan in your debt snowball you will knock it out first. The key with a snowball is to keep this same payment applied to all your loans until there are none left. So after you pay the first loan, take that $200 and apply it as extra principal payment on your second loan. After the second one is gone you can make a $300 extra principal payment that should be applied to the last remaining loan. In the end, you will be making a $400 monthly payment on your last loan.
The beauty of a debt snowball is that once you have figured out what your number is, it will never change. You just have to keep setting aside the same amount month to month. It makes it easier to keep yourself accountable.
I love helping clients destroy debt, save for their goals and build their wealth. Let me help you understand your loans, find your number and create your debt snowball.
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Steven LaFleur grew up in Rapid City, SD and after high school went to college at the University of Nebraska-Lincoln where he majored in finance and met his wife Kelly. After college graduation in 2013 working for the family business for three years, Steven decided it was time to pursue a passion of his in helping people and their finances. Steven is now a financial advisor at True Measure Wealth Management in Omaha, NE. Steven and his wife Kelly have two daughters who keep them busy at all times of the day. Steven enjoys skiing in the mountains and also biking and golfing during the non-snowy months.