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# How a debt payoff planner can help you organize and eliminate debt

## Creating a plan is the first step to conquering debt and reaching your financial goals.

Contributing Writer at Tally

November 24, 2020

Proper planning is a critical part of life. It helps keep things in order and on schedule. The same is true if you’re trying to reach your financial goals, like paying off debt.

A debt payoff planner can help you organize your debt, create an action plan and stick to it. And if you fall off track for any reason, it provides you with an easy way to pick up where you left off. Below, we'll cover how to create a debt payoff planner and be on your way toward a debt-free life.

## Set a monthly budget

When creating a debt payoff planner, you have several debt repayment options. No matter which debt repayment route you take, it all starts with making a budget and sticking to it.

### Calculate your monthly expenses

Create a list of all the monthly payments you make toward your bills. Things like:

• Rent

• Utilities

• Subscriptions

• Groceries

• Dining out

• Entertainment

Be sure to also list your minimum payments for credit cards and other debts.

If a bill amount varies each month, use the last 6-12 months of bills to determine a monthly average and use that amount. If you don't have 6-12 months of bills to average out, it's OK to estimate and adjust later.

Consider your less-frequent bills, like those that come annually or quarterly. Convert these longer-term bills into monthly amounts by dividing each bill amount by the number of months in the billing cycle.

For example, if you have an annual car insurance bill of \$1,200, the monthly amount would be \$100 (\$1,200 ÷ 12 = \$100).

Add all your monthly bills together to create a total living budget.

### Calculate your income

The next step is to calculate your income. Add up your take-home pay — the amount you deposit into your bank account after taxes — for an entire month.

If your pay fluctuates each month, find the average of the past 6-12 months and use that number. If you don't have 6-12 months of history to average out, write down your best estimate and adjust it later.

If you're a contractor or freelancer and pay your own income taxes, use the IRS Tax Withholding Estimator to estimate your annual income tax. Subtract your annual income tax from your expected yearly income to get your yearly take-home income.

Finally, divide your yearly take-home income by 12 to get your monthly take-home income.

For example, if your yearly take-home income is \$50,000, your monthly take-home income would be \$4,166.67 (\$50,000 ÷ 12 = \$4,166.67).

### Calculate budget surplus or deficit

Subtract your total living budget from your monthly take-home income. If you have extra money after that, you can use the surplus to make additional payments to pay off debt faster.

If you come up with a negative number, you have a budget deficit. In this instance, you must either trim expenses by cutting unnecessary luxuries.

For example, you might have to limit your streaming subscriptions and daily trips to the coffee shop, or increase your income through taking on additional side gigs or a second job.

## Review and organize your debts

Get a clear picture of your debt by reviewing and organizing it. If you don't have all your debts committed to memory, you can get a rundown from a free credit report. You can get this once per year from AnnualCreditReport.com or a free online credit monitoring site. Doing so doesn’t affect your credit.

Organize your debts into two lists. In the first list, organize your debts — including credit cards, student loans, auto loans and others — from the lowest balance to the highest balance. In the second list, organize your debts from the highest interest rate to the lowest interest rate.

## Choose your debt payoff strategy

With your budget set and debts organized, it’s time to choose the debt payment plan that meets your needs. Here are some common debt payoff plans, their pros and cons, and how to determine if they're right for you.

### Debt avalanche method

Debt avalanche is a popular debt repayment method because it prioritizes high-interest-rate debts, meaning it can save you money on interest charges.

With the debt avalanche approach, you pay the minimum payments on all your debts, then apply any remaining money in your budget toward the debt with the highest interest rate. Once you pay off that debt, you apply all your extra money to the debt with the next-highest interest rate while satisfying the minimum payments on your other debts.

If you have two debts with the same interest rate, prioritize the one with the highest balance.

#### Debt avalanche pros

The biggest benefit of the debt avalanche method is the money you save on interest charges. It's also beneficial because it gives you a structured order to pay your debts, eliminating any guesswork.

#### Debt avalanche cons

The downside to the debt avalanche strategy is that it may take a while to pay off your first debt since it prioritizes high-interest-rate debts. This can be discouraging and may tempt you to abandon your debt management plan.

### Debt snowball method

Similar to the debt avalanche plan, the debt snowball method places your debts in a specific repayment order. The difference is in which debts take priority.

With the debt snowball method, you make the minimum payments on your debts and apply any extra money in your budget to the debt with the lowest balance. After paying off the lowest-balance debt, you apply all your extra money to the next-lowest-balance debt while continuing to make minimum payments on all other debts.

#### Debt snowball pros

Since it prioritizes your lowest-balance debts, you’ll likely pay off your first debts relatively quickly. These quick wins can motivate you to stay on track throughout your debt repayment strategy.

#### Debt snowball cons

Because the debt snowball prioritizes low balances, it can leave you paying only the minimum payments on high-interest, high-balance debt. As a result, you could end up paying a lot in interest charges over the long run.

### Debt consolidation

Another debt repayment strategy is consolidating all your debts into one lower-interest personal loan called a debt consolidation loan

Debt consolidation loans are popular for a couple of reasons. First, the lower interest rate will help you save money on interest charges over time. Second, they can make your debt more manageable by replacing multiple monthly payments with a single payment.

When you get a debt consolidation loan, the lender usually deposits the funds into your bank account or sends you a check. You then use the funds to pay off your debts. However, some debt consolidation loans have stricter policies and distribute the money directly to your creditors instead.

#### Debt consolidation pros

The two biggest upsides of a debt consolidation loan are the lower interest rate and reduced number of monthly payments. Depending on your credit card and loan terms, debt consolidation can also lower your total monthly payment amount.

Another potential benefit is the positive impact a consolidation loan can have on your credit score. The FICO credit scoring model favors installment debt, like a personal loan, to revolving credit card debt. Paying off revolving credit card debt with an installment loan may increase your credit score.

Paying your credit cards off with a personal loan will also lower your credit utilization ratio, which is your combined credit card balances relative to your combined credit limits. Since your credit utilization ratio accounts for 30% of your FICO credit score, lowering it may increase your score.

#### Debt consolidation cons

The downside to a debt consolidation loan is that you often need good credit to get approved for the best loan terms. There's also the chance that you won't get approved for a loan large enough to cover all your debts.

### 0% balance transfer

To attract new business, some credit card issuers offer 0% balance transfer promotions. You can move your high-interest credit card balances to these balance transfer cards and take advantage of 0% interest for a fixed promotional term.

The 0% interest rate helps you save money on interest charges, but a balance transfer card isn’t completely free. Most balance transfer cards charge a 3%-5% balance transfer fee. So, if you transfer \$1,000, the credit card issuer will add a \$30-\$50 fee to your balance.

If you pay off the credit card within the promotional term, you can get out of debt interest-free. However, if you exceed the promotional term, you'll start paying the standard interest rate on the remaining balance after the promotion’s expiration date.

#### 0% balance transfer card pros

Transferring your current balances from high-interest credit cards to a 0% balance transfer card can eliminate all interest charges, saving you money.

Because there are no interest calculations to make, a 0% balance transfer card makes it easier to project a payoff date.

#### 0% balance transfer cons

The balance transfer fee can sometimes exceed the total interest you'd pay on your original credit card. While there are some balance transfer cards for fair credit, you likely need a good credit score to qualify for balance transfer credit cards with the best terms.

## Determine a debt payoff date and schedule

A good debt payoff planner will also have a payoff date and schedule to follow. This process will vary between debt payoff strategies. Some are easy to determine, but others require the help of an online calculator.

### How to calculate your debt snowball or debt avalanche

If you're using the debt snowball or debt avalanche method, you must make precise interest calculations to determine when you’ll be debt-free.

To help ease the calculations, you can find an online calculator by entering "debt snowball calculator" or "debt avalanche calculator" in a Google search. Some calculators are better than others, so check out several options to find the one that works best for you.

Some online calculators will allow you to export a payment schedule that you can print and follow. Otherwise, you can transfer the online calculator’s payoff schedule into a notebook or onto a computer program like Excel.

### How to calculate your debt consolidation

A debt consolidation loan is an installment loan, so the lender will predetermine its payoff date based on the terms of your agreement. However, you can accelerate the payoff date by making additional monthly payments.

Calculating the payoff date when making additional payments requires careful interest calculations, but online calculators can help with this. If you Google "extra payment calculator," you'll find a range of calculators that will show how your extra payments impact your estimated payoff date.

### How to calculate your 0% balance transfer

Calculating the payoff date when using a 0% balance transfer card is relatively simple. Add the balance transfer fee to the total balance you're transferring to the balance transfer card to get your new balance. Divide the new balance by the monthly payment you plan to make to get an estimated payoff time.

For example, if you transfer \$1,000 to a balance transfer card with a 5% fee, you'd end up with a \$1,050 balance. If you can afford to pay \$250 per month toward the balance transfer credit card, you'd be debt-free within five months (\$1,050 ÷ \$250 = 4.2).

## Get organized with a debt payoff planner

A debt payoff planner is an effective way to organize debt and determine a target date to become debt-free. Setting up your debt payoff planner årequires some upfront work, including:

• Creating a monthly budget

• Reviewing and organizing your debts

• Choosing a debt repayment strategy

• Determining a debt payoff date

Once you complete these four steps, you’ll have a useful debt payoff planner to guide you through the debt repayment process. If you ever stray from your path, your planner can help get you back on track.