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How to Make a Debt Payment Plan

Make a clear plan to say goodbye to your debt faster

Imagine this: Nia, picked up a puppy at the pound. She created a budget to care for him and named him Rocky. But Rocky caused some unexpected expenses that left Nia with some unpaid bills. She thought she could pay it off in a few big chunks but kept coming up short at the end of the month. Soon Nia found her overly optimistic payment plan was costing her a lot in interest and fees, with a stubborn balance that refused to go away.

Like many people who end up in debt, Nia had the best of intentions. Many Americans end up in debt for a variety of reasons; including auto loan expenses, credit card expenses, student loan expenses and mortgages. Aggregate household debt balances has grown to $13.54 trillion as of December 2018. Nia had no plan to go into debt over her dog. But that first month Rocky destroyed Nia’s couch. Then a slight limp at the park turned out to be a hip problem. Nia ended up accumulating debt to pay for a new couch and Rocky’s hip replacement surgery.  The puppy-related charges pushed her outstanding debt balance to $5,000. Nia thought she would pay back the charges quickly, so didn’t concern herself with the high APRs and fees.

The issue with Nia’s plan was that each month she had less money left over than she expected. Without a budget to stick to, Nia watched as the interest mounted. Nia soon realized her ideal payment plan was unrealistic and she would need to pay more attention to her finances to get her debt balance back to zero. Let’s look at some common debt misconceptions that tripped her up and how you can avoid making the same mistakes.

Misconception #1: "I'll have more money tomorrow - and then I'll pay the debt."
Reality: You can’t spend the same dollar twice. If you need to put money toward paying down a debt, that’s cash you can’t spend on something else. Without creating a budget, you may not notice the money in your account has already been allocated elsewhere. Spending on other bills, even necessities, means the money will not be there to cover the payment you planned to make at the end of the month.

Misconception #2: "I'll spend less this month than last."
Reality: It's easy to create a budget for recurring costs - like rent, utilities and gas. But soft costs - from small home repairs to meals with friends - are harder to account for, since they are often unplanned. Figuring out the average of what you spend each month can help you develop a more solid budget. 

Misconception #3: "Manually paying my bills each month makes me more responsible."
Reality: When you manually pay a bill at the end of a month, you're reevaluating your priorities based on what you can spend in that moment. That sets you up to make tough decisions every month. By automating your payments in advance, you can make paying down debt non-negotiable - in your head and in your bank account.

Misconception #4: "It's not a real debt because I'll pay it off really soon."
Reality: Debt only stops collecting interest when it's gone. If you tell yourself you'll make a lump payment and you don't - only paying the minimum instead - you're setting yourself up for disappointment. Making regular, manageable payments can be a more realistic path to a zero balance. And you won't be making those monthly payments forever. Each equal payment will get you closer to that realistic goal of being debt-free.

For Nia, thinking realistically about repaying debt meant abandoning her wishful thinking. Instead of convincing herself she would pay that big sum tomorrow, she applied for a personal loan from Marcus with a lower interest rate. And with automated payments set up, she doesn’t constantly think about making payments. Plus, organizing her budget has allowed her to set aside some money for an emergency savings fund.

Get across the finish line: Set goals to repay your debt within a specific timeframe, acknowledge your spending habits and determine if you need to adjust your habits to achieve your goals. By paying a little bit at a time, you may be surprised at how quickly that end date comes.

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This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.