The First Step to Pay Down Debt
Before you can make a plan to pay down debt, you’ll need to take inventory of your debt. Taking inventory means knowing what debt you have and some key details about it.
Although this step may sound simple, many of us are afraid to look or feel totally overwhelmed when thinking about it. Facing our debt and the specific details around it can feel like an incredibly intimidating task, but most often, we’ll be less stressed when we know exactly where we stand.
Once we are fully aware of our situation, we can do something about it. Once we know what we’re dealing with, we can make a plan to handle it. There’s power in that.
So if you are ready to pay down debt, it’s time to take inventory by gathering some key pieces of information. Here’s a handy pay down debt tool to make this process as straightforward as possible. You can also make your own inventory sheet in Excel, Google Docs, or even on a piece of paper. It’s less important where you do it - the key is actually doing it.
Here’s how to take inventory of your debt, step by step.
Step 1: Pay Down Debt: First, name the debt.
List each piece of debt you have in the left hand column of your inventory tracker. You can name it anything that makes it clear which item you’re talking about. This list will include everything you owe including: credit cards, student loans, personal loans, mortgages, car loans, and money you owe to family and friends. Here, you are just naming the debt - there are no numbers.
If you are feeling a lot of resistance around this step, that’s okay. Seeing everything we owe in one place can feel very overwhelming. If you’re feeling overwhelmed by step one, plan to take a break before starting on step two. Be sure to put a reminder in your calendar so you don’t forget to continue the inventory process.
If you were generally familiar with what debt you have and were able to list out each item you owe, continue on to step two!
Step 2: Pay Down Debt: Next comes the balance.
Next to each piece of debt you’ve named, add how much you owe. This amount you currently owe is called the balance. I like to include two different columns here: one for the “Original Balance” (the amount you owe when you do this exercise) and another called “Current Balance” to update monthly (or in regular intervals) to track your progress.
It’s really motivating to see the progress you’ve made on this journey. So for now, you will only have a number in the “Original Balance” column (column 2), which never changes. This stays the same so you have a benchmark for how much debt you’ve paid down. As you pay down your debt, you can update column 3, “Current Balance.”
At the bottom of your list, add a total. When you add up the original balance of each item on your list, you will see the total of how much debt you have. You can also total up the third column going forward as you pay down debt to see how much debt you’ve paid down. You can also add a column where you are showing the difference if that helps you see your progress more clearly.
Step 3: Pay down debt: Gather your interest rates.
Whew! You now know what debt you have and exactly how much you owe on each piece. Now, find the interest rate for each piece of debt. This is also called annual percentage rate (APR) or annual percentage yield (APY). Some credit cards make it really hard to find this information! This can be the fourth column of your pay down debt tracker.
This number might be called out in a credit card statement or you can get an estimate yourself. To estimate the interest rate yourself, open your most recent statement and find the interest charges from that month as well as the beginning balance on your credit card that month. Divide the interest you were charged in the month by the beginning balance and multiply by twelve.
Finding out how much we are being charged in interest can be very unpleasant. Some debt, like credit cards, are really expensive and we end up paying out a lot of money in interest. Credit cards can charge 20-25% in interest. That means if we hold a balance on our credit cards, we’re paying 20-25% of the cost of the item each year! I look at it like an annual reverse sale on things we already purchased.
This step is admittedly depressing, and knowing that we’re being charged a lot of interest doesn’t make it any easier to pay down debt. However, it’s important to know f how much we’re being charged so we can better prioritize which debt to pay down first.
Step 4: Pay down debt: Find your minimum payments or payment amounts.
Next, we’ll determine how much we need to pay each month toward each piece of debt. For credit cards, this comes in the form of minimum payments, or the minimum amount you’re allowed to pay the credit card company each month without incurring a penalty. You can find this amount on your latest credit card statement. This number can change month to month but for simplicity, just include the latest amount.
I know many of us want to put more money aside than the minimum payment on our credit cards each month. We’ll get to that - don’t worry! For now, just include the absolute minimum you are required to pay on each credit card.
For other loans, like your student loans, mortgage, etc. this number is the regular loan payment (the amount you are required to pay each month).
Step 5: Pay down debt: What are your payment dates?
Finally, we need to be aware of when each payment is due. Not only is this helpful for planning, but it also is helpful to see if certain paychecks are getting hit harder during different parts of the month. For many, it’s helpful to space out rent and debt payments since they are often big expenses. After mapping this out, you might opt to make credit card payments mid-way through the month so you have another paycheck before rent is due.
Now that you’ve gathered the key information for all of your debt, you’ve taken the first step in paying it all off! You’ve taken inventory. This is a huge step and accomplishment. It's worth taking the time to celebrate!
From here, you’ll want to prioritize your debt so that you can formulate a plan to pay it off. You will be able to prioritize your debt in the same spreadsheet.
Going forward, continue updating your current debt balances and updating any other changes, like your required minimum payments. It’ll be exciting and motivating to see your balances decrease, and you’ll know exactly where you stand in the process.