Step 3: Make a plan to pay off your debts

After setting up a budget, and using this to start controlling your spending, it’s time to find out exactly how much you owe and where.

Make a list of all your credit cards, loans and your mortgage. Then you will need to gather the following information for each of your debts:

The outstanding balance
The interest rate (APR)
The minimum monthly payment
The time needed to pay off the debt (aproximately)

Now - you need to place your debts in order of priority. You can do this in two ways:

Start with the debt that you can pay off in the shortest amount of time, and finish with the one that will take you the longest to pay off.
Start with the most expensive debt you have (highest APR), and finish with the cheapest.

The first method may take you a bit longer, since there’s a chance that you will be paying more in interest over the period of time it will take you to pay off your debts - but it’s a great method if you’re personally driven by accomplishment.

The second method is good for you if you can “see the bigger picture”, and in turn you will be able to pay off your debts faster this way, because your interest payments will be less than by using the first method.

Both methods are great for - and should be used by - individuals with the personality for which they are best suitable. If you’re unsure which category you fit in to - go with method 1.

While setting up your budget in step 1, you should know how much you can pay back on your debts each month. Keep paying this amount off on your debts all the way through, and increase the amount if you have any funds spare.

Now - focus your attention on the first debt on top of your list. While continuing to make minimum payments on all the other debts you have, pay off all you can on this particular debt. If this is not possible (i.e. with a loan that will not allow extra payments) - put the money aside in a savings account until you can settle the debt in full.

Using this way of repaying your debts - most people will find themselves out of debts in 5-7 years. Even those with a mortgage on their house.

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