How Do I Budget To Pay Off Debt? Learn 3 Simple Rules (2024)

Nearly 340 million American adults carry some kind of debt. That’s a lot. If you’re also one of these millions of people, you’d be wondering how to get rid of this debt.

What if we tell you budgeting could be the way out? You don’t have to take out another loan to pay your previous one or ask (begrudgingly, of course) for financial assistance from that one relative who secretly rejoices at your downfall.

Learning how to create a budget is simple. But here’s the tricky part: how to budget for debt repayment. Let us help you out.

How Do I Budget To Pay Off Debt?

Budgeting to Pay Off Debt: A Step-by-Step Approach

Budgeting can be hard. We agree. But if you take a strategic approach, it may not be as bad as you imagine. Here’s a step-by-step guide to help.

1. Prioritize Debt Repayments

We’re all on the same page in saying that debt is a bad thing. But some forms of debt are worse than others. For example, payday loans and credit card debt come with exorbitant interest rates that can quickly add up.

If you have multiple types of debt, such as student loans, credit card debt, a mortgage, and an auto loan, prioritize them in order of repayment. Which will you pay first?

That depends on the APR (annual percentage rate) and the amount of debt that you owe. Consider the loan terms, too. Get rid of debt with unfavorable terms first.

There are two main debt repayment prioritization methods to choose from.

Debt Avalanche Method

In this strategy, you pay off the loans with the highest APR first. That way, you will save more money in the long run. If you have the discipline to stick to a strict budget, this approach is for you.

Debt Snowball Method

If the big mortgage or other towering debt is too intimidating, start with the smallest amount of debt first. That’s the snowball method. Here, you pay your smallest debt first, moving up the ladder as you go.

2. Select Budgeting Strategies

Now, we’ve come to the juicy parts: the budgeting strategies. We’ll preface this with a disclaimer: there is no one-size-fits-all approach to budgeting.

You can choose one or more of the following budgeting methods based on your preferences.

Zero-Based Budgeting

The concept of zero-based budgeting is simple: your income and expenses should be equal in a way that at the end of the month, the difference between both is 0.

Let’s explain with an example. Suppose you earn $4,000 a month. You must assign every dollar in this amount to a category, such as groceries, utilities, rent, transport, shopping, debt repayment, etc.

By the next payday, you should start from $0 again. How this helps in debt repayment is that you can determine your overall expenses at the beginning of the month.

Suppose all your necessary expenses, including rent and food, come up to $3,000. You allocate $500 to miscellaneous expenses like Target runs and shopping.

That leaves you with $500. Instead of letting it sit in your bank account or buying something you don’t need, you can dedicate it to debt repayment. With this formula, you already know you have $500 that you don’t need for any essential expenses.

So, instead of waiting for the end of the month, you can simply set up automatic payments towards your debt.

50/30/20 Budgeting

We’ve all heard of the good old 50/30/20 budgeting rule: divide your income into three parts.

50% of it should go towards necessities, such as rent, food, and utilities, while 30% can be used for discretionary spending, like eating out. As for the remaining 20%, it goes to debt repayment and savings.

Just know that this is a generic formula. Not everyone will have enough income to spend 30% on ”wants.” That’s alright. You can tweak the distribution of money as it suits you.

Just make sure you have at least 10% for debt repayment every month.

Spreadsheet Budgeting

If you’re the kind of person who has to note down everything, spreadsheet budgeting is the way to go. Here’s how it works:

• Create a Google Sheet or print out a paper sheet.
• Input the amount you spend every time you purchase something.
• Track your expenses for the whole month.

A visual representation of your spending habits and patterns can make a lot of difference. It will help you see where all your money goes and where there might be room to cut down.

Once you find this cut-down area, take the money from there and allocate it to debt repayment.

Pay Yourself First Budgeting

Pay Yourself First is a bit like zero-based budgeting, but you don’t necessarily have to end with $0. The idea is to give yourself a fixed amount of money before balancing the rest of your income.

Where will this portion of money go? Towards debt repayment.

Let’s say you make $5,000 a month. Every month, as your salary comes in, pay 10% to yourself. That’s $500 you can use to pay off debt.

Now, you can divide the remaining $4,500 among other categories.

3. Be Smart About Debt Repayment

The last step is to be smart about debt repayment. Here are two ways to do this:

• Debt Consolidation: If you have four types of debts, combine them all into one loan. It will help you pay off the amount faster and often at a lower interest rate.
• Debt Refinancing: In this case, you refinance credit card debt for a lower interest rate. For example, you transfer a high-interest credit card balance to a zero-interest or low-interest account.

If you’re unsure about the right approach for your needs, consult a financial advisor. They can help you come up with an effective repayment plan.

Wrapping It Up

Dealing with debt can be quite overwhelming, but the way the economy is at the moment, it’s pretty difficult to avoid being in debt. The key is not to make it your comfort zone.

Instead, cut a few expenses and take the extra money from there to pay off debt. Once you get into the habit of budgeting, you’ll be well on your way to becoming debt-free.