Making a Debt Management Plan
Everybody who has debt should have a debt management plan. Even if you have no credit card debt, you may have an automobile loan or a home mortgage, and should have a plan in place to manage and pay off these debts.
So what is a debt management plan?
A debt management plan is thought of primarily as a plan to pay down your existing debt, but it is also a plan to keep you from growing your debt or incurring new debt. You can easily put together your own debt management plan by following just a few simple steps. In order to do this, you will need to pull out a month or two of your bills and grab a pen, paper and a calculator.
Debt Management Plan: Step 1.
The first step in putting together a debt management plan is adding up your debts. You should start by making a list of every debt you owe to every creditor. I would also suggest that when you make your list, you write down for each debt: (a) the monthly payment, (b) the interest rate for each loan and, (c) if applicable, when the debt will be paid off. Total up your monthly debt payments because you will need them for Step 2.
Debt Management Plan: Step 2.
Once you have made your list, the next step of your debt management plan is to determine how much disposable income you have exclusive of your debt payments. In order to do this, you have to write down your monthly income and then deduct all of your monthly expenses (i.e., cable, internet, phone, utilities, auto insurance, groceries, etc.). I do not recommend that you include expenses for non-essential, entertainment items because these will be addressed in Step 5. Now subtract your monthly expenses from your income, and this will give you your disposable income exclusive of your debt payments.
Debt Management Plan: Step 3.
Step 3 is simple. Is the number you came up with in Step 2 larger than the number you reached in Step 1? In other words, do you have enough income to pay your debts? If not, you must either increase your income, decrease your expenses, or conclude that you cannot pay your debts. There are some very good strategies for balancing out your debt and income. Those will be addressed in later installments of this series. For now, I will assume you are able to pay your current debts with your current income.
