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How to Use a Budget to Pay Off Debt

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Budgeting your money can help you understand your finances and reach your financial goals. If your No. 1 financial goal is paying off debt fast, then certain budgeting methods can be more practical than others.

Read this guide to learn how to pay off debt with different budgeting strategies.

Step 1: Prioritize which debts to pay off first

Not all debt is bad debt, but some forms are worse than others. Some types of debt are necessary to help you achieve life’s milestones, such as purchasing real estate or earning a college degree. Plus, student loans and mortgages typically have lower APRs when compared with high-interest unsecured debts.

Meanwhile, revolving credit card balances can drain your wallet, particularly when you’re still paying interest on purchases you made months ago. Payday loans, which are often used to help tide over people who are living paycheck to paycheck, come with exorbitant APRs. Even a personal loan with a high APR can be a burden on your finances.

What debt to pay off first…

  • Payday loans
  • Revolving, high-interest credit card debt
  • Personal loans with unfavorable terms

It’s typically advised to pay off the debt with the highest interest rate first. This is known as the debt avalanche debt payoff strategy. Debts with high fees are more expensive debts, which is why it’s most effective to prioritize paying down these debts before others.

Step 2: Choose a budgeting strategy

Once you’ve identified the debts you want to target first, choose a budgeting strategy that helps you achieve those goals. The best way to pay off debt will depend on your financial goals and unique situation. It’s important to be realistic when deciding which budgeting strategy to use; pick one that you know you can adhere to month after month. You can choose from many budgeting strategies, but these ones are helpful for paying off debt fast:

Zero-based budgeting

Zero-based budgeting is fairly simple: At the end of the month, your income minus expenses should equal zero. In other words, every dollar in your budget serves a purpose. Instead of having leftover money that is used for debt repayment, you allocate a certain amount toward debt repayment (among everything else).

Income – Expenses = $0

As an example, assume you make $3,400 after taxes per month. Your debt repayment budget may look like the one shown below:

While the concept for this budget is simple, the execution is easier said than done. You have to track every single dollar of income you make and assign it a purpose. It can be challenging to keep up with a budget this strict, but it can be worth all the effort when you get to see how every dollar you earn is spent.

To better keep up with a zero-based budget, it might help to download a budget app on your smartphone. These apps can automatically categorize your spending by linking your bank accounts, which could make it easier to ensure you’re not overspending in certain categories.

Why it’s good for debt repayment: It’s easy to just put any remaining income at the end of the month toward paying down debt, but you could be allocating more toward repayment when you deliberately set aside a precise amount in your budget. Zero-based budgeting helps you restrict unnecessary spending, which could cut into your financial goals.

50/30/20 budget

50/30/20 is a simple and classic budgeting rule that dictates how you should be spending your income:

  • 50% of your income should go toward “needs,” which are necessary living expenses like auto loan and mortgage payments.
  • 30% of your income should go toward “wants,” which include dining out at restaurants and paying for streaming subscriptions, like Netflix and Amazon.
  • 20% of your income should go toward savings and debt repayment.

This budgeting method has the benefit of simplicity. However, it might not work for everyone, particularly those with lower incomes — 30% of your income can be a lot to spend on expenses that aren’t entirely necessary, especially if you have a goal to pay down debt fast.

If you find that 50/30/20 doesn’t meet your needs, you can adjust it as you see fit. Your needs may amount to more than half your income, so you could potentially cut spending from your wants to compensate. You could also look for ways to cut down on your necessary expenses, like refinancing your mortgage or switching to a lower-cost gym membership to save money. On the other hand, you can dedicate more than 20% of your income toward savings and debt repayment.

Tip: Once you’ve decided how much you want to allocate toward debt repayment, set up a direct deposit to automate the process. You may also be able to set up automatic payments on your credit card using online banking. This can help you pay more toward your debts than the minimum payment or even the statement balance.

Why it’s good for debt repayment: This budgeting rule dictates that you put 20% of your income toward savings and debt repayment. But if you have a more aggressive debt repayment goal, you could potentially set aside more than 20% of your income for this purpose by cutting spending on your wants or needs. With the benefit of flexibility, this budgeting rule can be molded to better fit your financial goals, making it a good strategy for paying off debt.

Spreadsheet budgeting

Nothing gives you control over your budget quite like a budgeting spreadsheet. This method requires that you input your spending into a spreadsheet every time you make a purchase. While it can be labor-intensive to track your spending, this method will give you a better idea of where your money goes every month.

You might find that you’re overspending on online shopping purchases that aren’t entirely necessary, or that you’re spending more on groceries than you had budgeted for. LendingTree has a customizable budgeting spreadsheet that you can download for free:

If you’ve ever thought, “I try to monitor my spending but I don’t understand where my income goes every month,” you should give this budgeting method a shot. Even if you just do it for a few months, it can shine a light on how you spend your income so you can set a realistic debt repayment schedule.

Why it’s good for debt repayment: Spreadsheet budgeting helps you strictly monitor your spending, so you can accurately allocate how much you could be spending on debt repayment. It’s important to know how much you can potentially spend on debt repayment each month, especially if you want to opt for a more aggressive debt repayment schedule.

Step 3: Simplify your budget by consolidating debt

One more step that can make it easier to pay off debt is to consolidate your debts into one place.

Consolidating debt can help you…

  • Keep track of your debt repayment progress
  • Decide how much to allocate to debt repayment
  • Know exactly how much you’re paying toward debt every month

Debt consolidation can be done in a few different ways, including balance transfers and personal loans. Compare your options in the table below:

Debt consolidation: Personal loan vs. balance transfer
Debt consolidation loan Balance transfer card
How it works Pay off high-interest debts with a lump-sum loan that’s repaid in fixed monthly payments. Transfer multiple credit card balances onto a new credit card with low or no APR.
Typical length 2 to 5 years, although some personal loans may come with longer terms. Credit card balances are revolving, but intro APR offers typically last up to 20 months.
Typical APR 10% to 25%, although offered APRs may be higher or lower depending on many factors. 13.46% to 17.72% for September 2020, according to CompareCards data.
  • Your debt will be repaid over a set period of time, so you’ll have a concrete plan for debt repayment.
  • You may be able to secure a lower APR than what you’re currently paying on your debt.
  • Good-credit borrowers may be able to repay credit card debt without paying interest by utilizing an intro 0% APR offer.
  • You can pay off debt without a loan.
  • Some borrowers may not qualify for an APR that’s lower than what they’re currently paying on their debt.
  • Select lenders may charge a loan origination fee, typically 1% to 8% of the total cost of the loan.
  • Not all borrowers will qualify for a balance transfer card, especially one with an intro 0% APR offer.
  • Balance transfer cards typically come with a limit, which may be lower than the amount of debt you need to consolidate.
  • You may have to pay a balance transfer fee, typically 3% to 5% of the balance.

A balance transfer credit card lets you transfer the balance of multiple credit cards onto one credit card with a lower APR. Some balance transfer cards come with an introductory 0% APR offer, which can last up to 20 months. This means you could potentially repay your credit card debt without paying any interest at all, as long as you complete your payments on a certain timeline.

Balance transfer cards, particularly the ones that have introductory 0% APR offers, are typically reserved for borrowers with good credit. Plus, you may have to pay a balance transfer fee of 3% to 5%. Another drawback: You can only use this strategy to repay credit card debt.

A debt consolidation loan is a personal loan used to pay off debt, such as credit cards and payday loans. Personal loans are lump-sum loans that are repaid in fixed monthly payments, which can help you establish a clear timeline for when your debt will be paid off. Good-credit borrowers may be able to secure lower APRs on a personal loan than what they’re currently paying on their credit cards.

Unsecured personal loans tend to come with higher APRs than secured loans, such as home equity loans, which could also be used to repay high-interest debt. Plus, it will be hard for borrowers with subprime credit to qualify for a personal loan with a competitive APR, if they qualify for a personal loan at all.


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