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Learn... Plan... Take Action... Eliminate Debt!

Steps to Build Debt Elimination Plan
  Step 1 - Assess the situation
  Step 2 - Analyze your spending
  Step 3 - Identify ways to reduce spending
  Step 4 - Develop the plan
  Step 5 - Take action
  Step 6 - Monitor the results
  Step 7 - Get help if needed
  Debt payment
  Debt evaluation
  Interest payment
  Debt worksheet (pdf)
  Debt worksheet sample (pdf)
  Debt worksheet (xls)
Assess your situation

The first thing you have to do is figure out your financial situation. Do you know how many credit cards and loans you have, what the balances are, and what the interest rates are? Do you know what your debt ratio is? Do you even know how serious your situation is?

Step 1 - Gather all of your documentation
You need to find your loan agreements, payment books, monthly credit card and loan statements, etc.

Step 2 - Make a list of your fixed loan particulars
For this step, you will concentrate on just those loans that have a fixed payment period (i.e. 60 months) and a fixed interest rate. Grab a piece of paper and divide it into seven columns. In the first column, write down the name of the lender. In the second column, describe what the loan is for (house, car, furniture, etc). In the third column, list the original amount that you borrowed. In the fourth column, show the total amount owed. In the fifth column, identify the monthly payment. In the sixth column, identify how many payments are left on the loan. In the last column, define the interest rate. For your convenience, we have included a debt form you can print and also an example you can follow. For those than can use it, we also have an Excel spreadsheet.

Step 3 - List your revolving loan particulars
For this step, you will add to the list your revolving loans, such as credit cards, that have an indefinite payment period and that allow you to continue to use them. Fill in the columns just like you did in step 2. In the third column list your total credit line as the original amount borrowed. In the sixth column, calculate how many payments are left using our debt payment calculator.

Step 4 - List your monthly income
On a sheet of paper, first list the income that you can count on each month, such as salary, non-overtime wages, alimony and child support, pension or retirement income, etc. Next to each source of income, list the net (after deductions) amount you receive each month. If you have occasional sources of income, such as overtime pay, bonuses, extra commissions, etc, you can include these items, but don't overestimate. If you are not sure how to compute your monthly income, you can visit our money management section.

Step 5- Compute your debt-to-income ratio
Basically a tool used by lenders, this ratio shows what percentage of your income is spent on paying for debt. For example, if your net income each month is $1,000 and your debt payments are $300, then your debt-to-income ratio is 30%. You can compute this ratio by dividing your net income (step 4) by your total monthly debt payments (steps 2 and 3), or you can use our debt evaluation calculator.

Step 6 - Assess your situation
The table below shows debt safety zones for various age groups.

If your age is: and your debt-to-income ratio is...
0 to 10%
10 to 15%
15 to 20%
Under 35
35 to 55
(one wage earner)
35 to 55
(2 wage earners)
Over 55

Even if the calculator shows that you fall in the "OK" or "Caution" zone, you're likely in trouble if one or more of the following situations apply to you:

  • You're unable to save money because of your debt payments
  • You depend on overtime, bonuses, or a second job to pay your expenses
  • You hold more than 6 credit cards, including cards issued by gasoline companies and department store.
  • You almost always make just the minimum monthly payment
  • You've borrowed from one lender to pay another
  • You've had to borrow from a friend or relative, or take an advance at work in order to pay your bills
  • You have made late payments on your bills
  • Creditors are calling you or sending you letters

As a general rule, if you are spending more than 28% of your income to pay your mortgage, or more than 40% of your income to pay all of your loans, then you are seriously overburdened with debt. Of course, your percentage could be much smaller and you could still have trouble making your payments. Even if your percentage is small and you never have a problem making payments, the bottom line is that you are paying for debt that you don't need. If you are routinely making debt payments every month, with the exception of your house and maybe one car, you have too much debt and you need to continue this process to begin reducing your debt.

Step 2 - Analyze Your Spending

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