Debt can feel like a heavy burden, weighing you down and making it hard to achieve financial freedom. One of the most effective ways to tackle it is by creating a budget specifically designed to help you pay it off. In this article, we'll show you how to create a budget to pay off debt, so you can pave the way to a debt-free future.
Whether you're dealing with credit card balances, student loans, or any other type of debt, the right budgeting strategies can help you make steady progress.
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How to create a budget to pay off debt in 8 steps
By following these steps and using some proven strategies, you'll be on your way to becoming debt-free:
1. Grab your calculator: How much do you owe?
The first step in creating a budget to get out of debt is understanding exactly how much debt you have. Make a list of all your debts, including credit cards, personal loans, student loans, and any other outstanding balances.
For each, note the total amount owed, interest rates, and minimum monthly payments. This will give you a clear picture of where you stand and help you prioritize which debts to tackle first.
2. Assess how much you earn
Next, track your monthly income and expenses. This will help you understand how much money is coming in and where it's going. List all sources of income, including your salary, side gigs, or any other income streams.
Then, categorize your expenses into fixed costs—like rent, utilities, and insurance—and variable costs—like groceries, entertainment, and dining out.
3. Take a hard look at luxuries
Identify areas where you can cut back. This could include reducing discretionary spending or finding ways to lower fixed expenses.
“You can’t get out of debt by spending the same way you go into it,” says Jonathan Feniak, investment advisor representative and lawyer at LLC Attorneys.
“Consider a spending freeze on any non-essentials for a few months, then setting a small budget for fun once you’ve rebalanced your spending habits,” Feniak says. “It’s not going to be fun, but the repayment sacrifice can help you get on a better track for a better financial future.”
4. Set a monthly debt repayment goal
Once you've freed up some extra cash, set a monthly debt repayment goal. This should be an amount above the minimum payments on your debts. The more you can allocate toward your debt each month, the faster you'll pay it off. Be realistic but also challenge yourself to make as much progress as possible.
5. Choose a debt-reduction approach
Having a deb-reduction approach is crucial for maximizing your debt repayment. You might want to focus on paying off the debt with the highest interest rate first (often referred to as the avalanche method) or tackle smaller debts first for quick wins (the snowball method of paying off debt).
We’ll dive into some strategies in the next section. Choose the approach that best motivates you and fits your financial situation.
6. Negotiate interest rates
Lower interest rates allow more of your payments to go toward the principal—the original amount of the loan—helping you pay off debt faster. “Negotiate for lower interest rates from your creditors or consolidate your debts so that you can reduce your monthly payments,” says Dayten Rynsburger, Chief Revenue Officer (CRO) of the lending platform Niche Capital CO.
Start by contacting your creditors directly, explain your financial situation and request a reduction in your interest rate. Be polite, but firm, and emphasize your willingness to continue making payments. Highlight your positive payment history if applicable, as creditors are often more willing to work with customers who have been reliable.
Additionally, researching competitor rates can provide you with leverage. If your current creditor knows that other lenders are offering better terms, they may be more inclined to match or beat those rates.
7. Set up automatic payments
You can typically do this one of two ways: Through your online checking account, or directly through the creditor (credit card company, student loan company, etc).
This will help ensure you never miss a payment, avoid late fees, and stay on track with your debt repayment plan. Automating your payments can also reduce the stress of remembering due dates and managing multiple payments each month. The only caveat: You need to make sure there’s enough money in your account to cover the payments, or else any overdraft might lead to fees and penalties.
8. Review your budget regularly
Your financial situation may change over time, and when it does, it's essential to adjust your budget accordingly. If you receive a raise, bonus, or any monetary windfall, consider putting that extra money toward your debt. Conversely, if your income decreases or expenses rise, you may need to adjust your repayment plan accordingly, so you don’t fall into more debt.
Budgeting methods to consider
If you’re wondering, “What is the budget rule for paying off debt?” be aware that there are different approaches that work for different people—and finding the right method for your situation is key.
50/30/20 budget rule
To understand how to budget and pay off debt, you can follow the 50/30/20 rule. What is the 50/20/30 budget rule? It's a method that divides your income into three categories:
- 50% for needs (essentials like rent, groceries, and utilities)
- 30% for wants (non-essential spending like entertainment and dining out)
- 20% for savings and debt repayment
If you're focusing on paying off debt, you can adjust the percentages to allocate more toward debt repayment—such as 50% for needs, 20% for wants, and 30% for debt.
Debt snowball method
With the snowball method, you begin by paying off your smallest debt (regardless of interest rate) and making minimum payments on the larger ones. “Once you have paid off the smallest debt, focus on the next smallest one with these funds,” Rynsburger says. “This method builds momentum through quick wins.”
Debt avalanche method
The avalanche method focuses on paying off the debt with the highest interest rate first, regardless of the debt amount. Much like the snowball method, you'll make minimum payments on all your debts, but any extra money will go toward the highest-interest debt.
This method potentially saves more money in the long run since it reduces the amount of interest you pay overall.
Zero-based budgeting
Zero-base budgeting involves allocating every dollar of your income to specific expenses, including debt repayment until you have a balance of zero.
This method forces you to be intentional with your spending and ensures that every dollar is accounted for. It's an effective way to maximize your debt repayment efforts.
Envelope system
The envelope system is a cash-based budgeting method where you allocate a certain amount of cash to different spending categories. Once an envelope is empty, you can't spend any more in that category.
It can help you avoid overspending and ensure that you have enough money to put toward debt each month.
“Don’t feel obligated to choose one or the other, but try the option and combination that makes the most sense for you,” Feniak says. “If you’re dealing with more than five debt accounts and a few are relatively small, use the snowball method to knock those balances out quickly and then move to the avalanche and prioritize chipping away at your highest-interest debt next.”
Tools to help budget to pay off debt
From budgeting apps to simple spreadsheets, there are plenty of resources available to help you track your progress and stick to your debt repayment plan.
Budgeting apps
Several budgeting apps can help you manage your finances and focus on paying off debt. “Online tools like Mint or YNAB can help categorize spending and track it, revealing how to find money to cut back on various areas and channel these funds to pay debts,” Rynsburger says.
Here are the details about some of the best budgets app to help pay off debt:
- Mint: Free budgeting app that tracks your spending, income, and debt. It also offers alerts and tips to help you stay on track with your debt repayment plan.
- YNAB (You Need a Budget): Designed to help you allocate your income to various spending categories, including debt repayment. YNAB emphasizes proactive budgeting and can help you break the paycheck-to-paycheck cycle.
- Debt Payoff Planner: This app focuses specifically on helping you create a plan to pay off debt, for free. It allows you to track your progress and offers customized payment plans based on the snowball or avalanche methods.
Bonus tips for success
Successfully managing your budget and paying off debt requires more than just following a plan; It also involves adopting smart financial habits and staying disciplined.
Here are some additional tips on how to make a budget to pay off debt that will help you stay on track and make the most of it:
- Stay motivated: Paying off debt can be a long and challenging process. Celebrate small victories along the way, like paying off a credit card or reaching a savings milestone. Remind yourself of the benefits of being debt-free: less financial stress and more freedom to pursue your goals!
- Avoid taking on new debt: This includes avoiding unnecessary purchases on credit cards and resisting the temptation to finance big-ticket items. Focus on paying off what you owe before considering taking any new loans or such.
- Seek support: If you're feeling overwhelmed, consider seeking counseling from a financial or credit advisor. They can offer guidance, encouragement, and tips to help you stay on track with your debt repayment plan.
- Be patient: What is the fastest way to budget to get out of debt? There is none. Becoming debt-free is a journey, and it won't happen overnight. Stay patient and consistent with your budget and debt repayment efforts. Over time, you'll see progress and get closer to achieving your financial goals.