How to Create a Budget to Get Out of Debt[yoast-breadcrumb]
How to Create a Budget to Get Out of Debt
Getting out of debt can seem overwhelming. With credit card bills, student loans, medical bills, and other expenses piling up, it can be hard to see the light at the end of the tunnel. But having a plan and sticking to a budget is the most effective way to become debt-free. I struggled with debt for years before finally sitting down, looking at my finances, and creating a budget. It took discipline and sacrifice, but I paid off over $15,000 in two years!
Now I want to share what I learned with you. In this article, I’ll walk you through the key steps to make a budget that tackles debt head-on:
Step 1: List All Your Debts
The first thing you need to do is list out all your debts. Pull out your credit card and loan statements and make a big master list. For each debt, include:
- The total balance
- The interest rate
- The minimum monthly payment
This gives you a bird’s eye view of what you owe so you can start strategizing. I recommend listing your debts from smallest balance to largest balance. That way you can start knocking out the little ones first to build momentum.
Pro tip: You can use a debt payoff calculator to estimate how long it will take to pay off each debt making minimum payments. This shows how expensive carrying debt is long-term.
Step 2: Track Your Spending
Next, you need to know exactly where your money is going each month. For 1-2 months, use an app or spreadsheet to track every dollar you spend. This will reveal spending habits you didn’t even realize you had!
Categorize each expense as “needs” like rent and groceries, or “wants” like dining out and subscriptions. This helps you identify areas to cut back.
I was shocked to see how much money I wasted on convenience purchases like takeout coffee and Uber rides. Just being aware of where my money was going helped me be more mindful about spending.
Step 3: Make a Zero-Based Budget
Now it’s time to make your zero-based budget. This is where every dollar earned is assigned a purpose on paper before you actually spend it.
Add up all your net monthly income. Then assign each dollar to one of the following budget categories:
- Housing – rent/mortgage, utilities, etc.
- Transportation – gas, car payment, insurance
- Minimum debt payments
- Savings – emergency fund, retirement, etc.
- Personal – clothing, toiletries, pet care
- Miscellaneous – gifts, tuition, medical, etc.
Go through each category and give every single dollar a job. You may have to trim down overspending categories so you have enough dollars to cover all your needs and debt payments. This takes some trial and error.
I had to cut way back on takeout and impulse shopping to free up money for debt repayment. Be prepared to make sacrifices, but also be compassionate with yourself.
Step 4: Increase Your Debt Repayments
Now comes the hard but most important part – increasing how much you pay towards debt each month. There are two strategic ways to do this:
Avalanche Method: This targets your highest interest rate debt first. You pay minimums on everything except the debt with the highest rate – throw as much money as possible at that one. When it’s paid off, roll that payment over to the debt with the next highest rate. This saves the most money overall by reducing your expensive interest charges first.
Snowball Method: This targets your smallest balance first. You pay minimums on everything except the smallest debt – throw as much money as possible at that one. When it’s paid off, roll that payment over to the next smallest debt. This gives you quick wins upfront which can motivate you to keep going.
I went the avalanche route to save on interest charges. But pick the method that resonates most with you – either can be effective!
Step 5: Look for Ways to Earn More Money
In addition to cutting expenses, look for ways to bring in more income that you can use specifically for debt repayment. Here are some ideas:
- Ask for a raise at your current job
- Look for a higher paying job
- Sell stuff you don’t use anymore
- Pick up a side gig like rideshare driving, tutoring, freelance writing, etc.
- Turn a hobby into a small business
Even an extra $100 or $200 a month makes a big difference when you’re trying to pay off debt fast. Don’t be afraid to get creative with earning opportunities!
Step 6: Automate Payments and Track Progress
Once your budget is set, automate payments for bills and debt repayment so you don’t have to think about it. Use auto-pay through your bank or set payment reminders.
And track your debt payoff progress! This keeps you motivated. I used a thermometer chart to watch my balances decrease over time.
Celebrate important milestones like fully paying off your smallest debt. Visualizing your progress reminds you that the budget and sacrifice is worth it!
Getting out of debt takes strategy, discipline, and patience. But it is so worth it! Paying off debt lifted this huge burden and completely changed my financial situation.
If you commit to the budgeting process, you can become debt-free too. Try different tactics until you find what works for you. And don’t be afraid to reach out for help – there are many free credit counseling services that can help you manage debt.
You’ve got this! Here are a few more resources if you need guidance:
- Tips for Budgeting to Pay Off Debt – LendingTree
- How to Get Out of Debt – NerdWallet
- Debt Elimination Plan – The Balance
Stick to your budget, keep chipping away, and you’ll join the debt-free club before you know it. Wishing you the very best in your journey!