How To Budget To Pay Off Debt
Even if you’re deep in debt, escape is possible with the help of a solid budget and repayment plan. Consider the good, the bad and the ugly of your financial situation, and then look over the different strategies below to find what works for you.
Once you know how to budget to pay off debt, you can free your money for more important things.
- Using a budget to pay off your debt starts with taking stock of what you owe.
- Next, pick a budget to use and choose a repayment strategy.
- Debt payoff can be a long journey, so try to reward yourself as you go.
1. Assess your financial situation
You can’t fix your debt problem until you look it square in the face. First, make a list of all your savings and assets along with all of your debt (including credit cards), so you have an exact number of what you owe.
Next, list out your wages and other income, followed by your regular monthly expenses and a rough estimate of other expenses that might vary throughout the year. Don’t just include your bills, but everything that you use your money for.
Some debt is “good debt,” meaning it helps you get an asset like a house (mortgage) or a college degree (student loan). But there’s also “bad debt,” like a high-interest credit card used for expendable luxuries. However, all debt must be repaid.
As you figure out the attack plan to conquer your debt, consider signing up for LendingTree Spring to get personalized money tips, along with free credit alerts and scores and other features.
2. Set clear debt repayment goals
The more specific you are with your debt repayment goals, the more likely you are to hit them.
For example, “I will pay off X dollars within 18 months” is a better goal than “I want to pay off all of my credit card debt soon.”
Remember to keep your goals realistic with what you can afford. It may take a few years to clear out all of your debt, so be patient. But in the meantime, you can also set shorter-term debt payoff goals like:
- Paying an extra $50 per month on a credit card beyond the minimum payment due
- Getting caught up on overdue payments
- Making an extra payment on your auto loan
3. Choose a budgeting method
Once you have a full accounting of your income and expenses and an idea of how much you need to repay, it’s time to pick a budget strategy.
There is no one-size-fits-all budgeting method. Look for one that’ll help find a little wiggle room that you can use for extra debt repayment.
Some good budgeting methods to consider include the following:
Zero-based budgeting
Zero-based budgeting means never carrying debt over from the previous month. You start with your monthly income and then make sure that the month’s expenses — from rent and food to debt payments and emergency savings — total the exact same amount.
You may have to cut costs to achieve a zero-based budget, and it might not be the best method if your earnings vary from month to month. But if you can do it, zero-based budgeting can make sure your debt gets smaller and not bigger.
50/30/20 rule
This budgeting method has you set 50% of your monthly income towards your needs, like housing and utilities.
Of the rest, 30% goes towards optional spending (“wants”) and 20% goes towards debt payoff or savings.
If your bills are too high to realistically use a 50/30/20 budget, you could try a 70/20/10 budget instead, with just 20% for disposable spending and 10% for repayment.
Envelope system
With this system, you make envelopes each month for every budget spending item — one envelope for rent and another for food, for example — and then fill each with the amount of money you can spend.
Let’s say you’ve set a $500 grocery budget. You’d put $500 in your “Grocery envelope,” and once it’s empty, you can’t spend any more on groceries for the month.
The original idea was to fill actual envelopes with cash, though you could also track “virtual envelopes” in other ways.
4. Pick a debt repayment strategy
Next, you’ll need a strategy to decide how to prioritize your debts. Of course, you’ll want to make your minimum payments each month and pay any late bills off first. But beyond that, you’ll want to decide which debt to focus on first.
There are two main debt repayment strategies — the debt avalanche and debt snowball methods — and both can be very effective.
Debt avalanche method
With the debt avalanche method, you’ll pay off the debt with the highest interest rate first. After paying the minimum on all your loans and credit cards, use any leftover money to whichever debt has the highest interest.
The avalanche method is meant to save you the most money by getting rid of the high interest cards and loans quickly. Ultimately, the less interest you have to pay, the faster you’ll get out of debt.
Debt snowball method
Instead of concentrating on high interest rates, the debt snowball method attacks your smallest debts first. After your minimum payments, you apply the extra funds to whatever debt has the lowest balance.
Although you may pay more interest over the long haul, the quick “wins” from knocking off a bunch of small debt quickly might give you the motivation to keep you on track with your budget and payoff plan.
Get a lower interest rate
Another strategy is to lower your interest rates through a balance transfer or a debt consolidation personal loan. You could do this while using the debt avalanche or debt snowball method.
Note, however, that you may need to improve your credit score first if you have a lot of debt. To do this, try to pay down your credit cards, but don’t close out accounts after they’re paid off — this can boost your credit score by keeping your credit utilization (the amount of available credit you use) at a low level.
5. Monitor your progress
Making a plan to pay off your debt is great, but the real magic happens when you monitor your progress along the way.
Keep reviewing your budget on a regular basis, looking for spending to cut down on or ways to increase your income, maybe through a side hustle.
For repayment, you could create a progress chart, dividing your debt into blocks of a certain amount — say $100 or $1,000 — and coloring in each block as it’s repaid.
You can also watch your progress by tracking your credit score. You should see it creep up as you pay off your debts, with those higher numbers offering more chances to lower your interest rates.
6. Make small changes to free up extra cash
As the cost of living gets higher, it can be tricky to find “extra” money to put towards debt repayment.
Some ideas to save money include:
- Cancel recurring subscription charges for services you never or rarely use
- Switch to a cheaper cable or phone plan, or call your provider to negotiate a better monthly rate
- Use coupons and cash back apps while shopping
- Borrow movies and books for free from your local library (libraries also often have free passes to local attractions, like zoos and museums, which you can rent)
Take whatever you save and put it toward your debt repayment. The more you repay, the less you’ll need to worry about saving in the future.
7. Track progress and celebrate milestones
As you track your progress, celebrate milestones you hit along the way to encourage yourself.
Maybe after you’ve paid off your first credit card, head out to a coffee shop with a friend to reward yourself for all that self-discipline. Or, you could plan a vacation for once all your debt is repaid.
When you do pay everything off, you’ll suddenly have money for other financial goals, like your retirement savings or your child’s college education. So in this way, learning how to budget to pay off debt can also teach you how to master your finances for life.
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