How to Pay Off More Debt Using a Budget

Benefits of Using a Budget to Pay Off Debt

Using a budget offers tons of benefits when your goal is to get rid of debt:

• Budgeting gives you a clear understanding of where your money goes each month, which can help you identify spending patterns and areas where you can cut back.
• It helps you pinpoint how much of your income you can safely devote to debt repayment.
• You'll be able to see how much of your income you can put toward an emergency fund. It's crucial to keep an emergency fund intact while eliminating debt so you don't go into additional debt if unexpected expenses arise.
• Budgeting helps you to set aside a reasonable percentage of income for fun and nonessential expenses, which can prevent your budget from being unduly stringent and demotivating.
• A budget allows you to calculate how much extra you can put toward your debt each month and then set up automatic transfers or autopay, letting you pay off debt using a "set it and forget it" approach.

How to Create a Budget to Pay Off Debt Fast

Creating a budget doesn't mean choosing a strict monthly spending limit and crossing your fingers that you'll be able to meet it. Instead, think of a budget as a way of separating your spending into buckets and assigning a percentage of your income to each.

A popular budgeting method is the 50/30/20 rule, which creates three spending buckets based on your monthly income. The steps you'll take when creating a 50/30/20 budget are similar to those of many types of budgets:

1. Write down your monthly after-tax income so you can see exactly how much money you have to work with.
2. List all your fixed and variable expenses throughout the month. These include groceries, meals out, entertainment, insurance payments, minimum debt payments, utilities, personal care and more.
3. Categorize these expenses into three buckets: necessities, nonessential expenses and savings/debt payments. Ideally, you'll be able to limit spending on necessities to 50% of your income and nonessential expenses to 30% or less, then allocate 20% (or more if you can) to savings/debt payments. If that seems impossible, try to get as close to this guideline as you can.
4. Adjust your expenses. If you're having a hard time making the budget work or finding enough to pay down your debt, you may need to make some changes. Maybe you can cancel some subscription services or limit ordering takeout to reduce your nonessential spending. You may be able to renegotiate cellphone contracts, cable bills and insurance policies to make them more affordable.

As you create and adjust your budget as necessary, look to reallocate money to your debt payments bucket so that you can contribute more than the minimum required each month. That could mean directing the $50 per month you save from cutting down on takeout toward credit card bills.

It can help to set six-month, one-year and 18-month debt repayment goals so you're more likely to stay on track. Check in on your progress at least once per month or once per quarter. Log in to your credit card or loan payment portal and see how far you've come.

Additional Ways to Pay Off Debt

You can use other strategies in addition to budgeting to make quick progress on your debt. These include:

• Debt snowball: Using this debt payoff method, you'll make the minimum payments on all your debts except for the one with the smallest balance, which is where you'll allocate your extra money until it's paid off. Then target the next-smallest debt and so on until all of your accounts are paid off.
• Debt avalanche: This method entails putting extra money toward the debt with the highest interest rate first. Once the first debt is paid off, you'll move on to the one with the next-highest rate. You'll save more on interest with this strategy than by using the debt snowball, but it could take longer to see progress.
• Credit card balance transfer: If you qualify for a balance transfer credit card with an introductory 0% APR rate, you can transfer existing credit card balances to the new card and pay off your debt at 0% APR for a period of time. Take note of any fees, however, such as balance transfer fees, and how much your APR will increase following the introductory period.
• Debt consolidation loan: Similar to a credit card balance transfer, a consolidation loan allows you to bundle multiple debts into a single one, ideally at a lower interest rate. A type of personal loan, consolidation loans are best for borrowers with good or excellent credit scores. High scores may get you access to the best interest rates and terms.
• Refinancing: You may be able to reduce interest rates on individual debts like student loans, car loans and mortgages by refinancing. Doing so can help you pay off debts faster by directing more of your extra money to principal rather than interest. Student loans, for example, can be refinanced through banks and other private lenders who use your credit score and financial profile to provide you with a new, potentially lower interest rate. Use caution, however, since refinancing federal student loans means missing out on important federal protections like income-driven repayment.