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Most of us have some form of debt. Whether it’s the credit card in your wallet, the line of credit you used to help pay for your child’s education or the mortgage on your home, it is common in our everyday lives. While there is nothing wrong with accumulating debt to help pay for things, it’s important that you understand how it works, what it costs and how you plan to pay it back.

If you are finding your debt is adding up and you’re not sure how you will pay it off, it may be beneficial for you to establish a plan to pay it off. While the plan may vary by individual, they tend to all have common elements, such as the following:

Step 1: List your debt

The first step is to make a list of everything you owe. This list should include your recurring monthly payments for expenses such as rent, utility services, cell phone bills, insurances, etc., as well as credit card and your long term debt.  Your long term debt could include lines of credit, student loans, vehicle loans and leases, and your mortgage. Your list should also include the minimum monthly payment for each item, the interest rates being charged, and the total amount you owe.

Step 2: Rank your debt

The next step in the process is to rank your debt into the order in which you want to pay them off.  Some experts recommend going from the smallest amount owing to the largest, as it helps to get momentum going and gives a great sense of satisfaction in knowing that you have fully paid one of the creditors. Others recommend that the debts be ranked from most expensive to lowest based on the interest rate. This method will save you the most money by reducing the overall interest being paid by you in the future.

Step 3: Figure out your income, expenses and left over amount

This step is about knowing the monthly income you have coming in and your regular monthly living costs. More importantly, it’s also about knowing the amount you have left over and available to be used to go towards your debt.  Once you have an idea of how much income you will have left over, you can evaluate how much you can afford to use to make extra payments on your long term debt.

Step 4: Set realistic goals

Keeping in mind that paying off accumulated debt can feel like running a marathon, it is important that you develop realistic goals.  For example, if you have $500 per month to go towards paying down debt and you owe $10,000, it is not reasonable to expect the full amount will be repaid within one year. A more realistic goal may be to have the debt repaid in two to two and a half years, depending upon the cost of interest.

Take it one debt at a time

Regardless of how you ranked the debt in the above steps, it’s important to work the plan, and pay off the highest ranked debt on your list.  Apply all extra money toward that first debt, while making sure you pay the minimum on all the other debts to keep them current with the lender. The reasoning behind this approach is that when you focus on one debt at a time, you are more likely to pay it off quicker, and you will get the joy of having paid off one of your creditors. Don’t forget to celebrate these successes after that fact as well!

At first, it may seem like it will take forever to pay off your first debt, but as you work down the list, you will gain momentum and as less interest is being paid, you may surprise yourself at how quickly you reach your goal.

If you are a senior and struggling with finances, I urge you to seek help from a financial expert, like a Licensed Insolvency Trustee. Most LIT’s provide free advice and walk you through all of your options.

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Josh Appel