How to set up an automatic debt repayment program
Want to pay off your debt? It can be done, but it takes hard work, sacrifice and patience. Most importantly it requires a solid plan that should hinge on budgeting and on using tools that will simplify the process, like an automatic debt repayment program.
What’s your debt solution?
If you have a lot of debt and are able to make your payments, but are really struggling, you might benefit from automatic debt repayment program like a debt management program (DMP) where a trained credit counsellor can help you repay your debt by negotiating with your creditors and teaching you how to budget. One of the benefits of this debt solution is that your payments are made automatically to your credit counselling agency, and they then pay your creditors on your behalf.
“Alternatively, if you don’t have a whole lot of debt, you can probably work with a budget and pay down each debt individually over time on your own. We’ll look at some strategies to do that below,” says Jeff Schwartz, Executive Director, Consolidated Credit Counseling Services of Canada.
How to set up an automatic debt repayment plan
To develop your plan, first gather all of your financial statements so you’re sure to include all of your debts. Determine how much you owe in total. Note things like interest rates and minimum payments. Don’t forget things like student loans or medical debt. If you owe money to your friends or family, include that in your total, because that’s still money that you’ll need to pay out.
Next, prioritize your debts so you can determine the order that you’ll pay them off in. You can either choose your smaller debts so you get them out of the way first or choose your highest interest debts so you can stop paying out all of that interest. Either approach is fine, so pick the one where you think you will be most successful.
Now establish a timeline to pay down the debt. Figure out how much you’ll need every month to pay your debts effectively. Set up a budget that allows you to apply extra money on your debt every month. This may mean that you’ve got to cut back spending in other areas so you’ve got the money on hand. You can also look at increasing your cash flow by getting a part time job, or finding other creative ways to earn money, like renting out a part of your home.
Put your automatic debt repayment plan into action
Once you’ve nailed down the details of how you can pay your debt down, take advantage of tools and services that can simplify your life and make your process seamless.
Start with your bank or financial institution. Most of them have free apps or tools that let you set up automatic debt payments. Apps like Mint.com and You Need A Budget (YNAB) are also helpful to centralize your banking, budgeting and automate your debt repayment.
It is important to note if your payments are the same every month, or if they fluctuate. If they fluctuate (i.e. your credit card bill) it’s probably good to do that automatic payment directly through the creditor to ensure that you’re paying the correct amount.
Leveraging digital technology to pay down your debt can be extremely beneficial, especially if you’re used to doing everything else online. The convenience and the regularity of automatic debt payments takes part of the responsibility for timely payments and ongoing calculations out of your hands, which can make a real difference when trying to pay down debt. That said, realize that there are pitfalls associated with automatic payments.
“There’s no question that apps and tools simplify your life and the debt repayment process. But there still needs to be a human component (you) that ultimately takes responsibility for your debt repayment. That means that you need to be watchful and have a plan in place to make sure the automated process goes smoothly,” says Schwartz.
If your creditor, bank or financial institution offers it, sign up for electronic alerts (text or email) to remind you that your payment is coming due.
Monitor your accounts to make sure that payments have been made on time. If they’re late, it will impact your credit score negatively as well as possibly leave you with additional finance charges. Ensure that you’ve got enough money in your account at all times to cover your payments (you don’t want to go into overdraft). Make sure you track all of your bill payments and spending, for cross-reference purposes.
Check the free structure with your money management app. There are free or low-cost ones, but there are varying fee structures. You don’t want to be paying out hefty fees for services or features that you don’t really need.
Another major concern with automatic payments is security. Be careful handing out passwords or using financial apps in unsecure areas (i.e. with public Wi-Fi). If you are banking at home, make sure that your home Wi-Fi is secure. Change passwords often and make them complex. Don’t forget that your banking information is vulnerable here, and it’s worth taking a few extra steps to ensure its protection.
How to stay out of debt
Now that you’ve paid down your debt, make plans to stay out of debt so that you can enjoy all the benefits of debt-free living. Close debts down after you’ve paid them off. Establish a budget that promotes cash flow and spend within your means. Direct as much as you can towards savings so you don’t have to turn to debt to cover costs in the event of an emergency.
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