How Can Budgeting Help You Pay Off Debt?
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Is your debt holding you back from financial growth? Even if you cover all of your payments each month, having debt can make it feel like you’re spinning your wheels and getting nowhere, especially if you have high interest rates.
If you’re like most people in debt, the last thing you want is to take a closer look at the numbers. But as uncomfortable as it may seem, reviewing your spending and making a budget is a surprisingly simple and effective way to get some relief from debt.
What is a Budget?
In its simplest form, a budget is a list that compares your monthly income to your monthly expenses. If your income outweighs your spending, you’ll want to examine each line-item expense and decide where to cut spending, and/or how much you need to increase your income.
The second goal of a budget is to help you reach financial goals. For example, if you want to pay off $3,000 in credit card debt in one year, you can cut your spending on non-necessities like unused subscription services, and use the freed up funds to increase your credit card payment to $250 a month.
Three Ways Budgeting Can Help You Pay Off Debt
When you create a budget, you put each of your hard-earned dollars to work in support of your goal. These are a few ways a budget can help you accomplish the goal of paying off debt:
1. Make a Real Plan
Budgeting can break the spell of wishful thinking and give you a realistic plan. When you create a budget, you can find out exactly how long it will take to pay off your debt if you don’t make any changes. If you want to speed up the process, you can review the numbers and find out where to make adjustments.
2. Clarify Your Spending Priorities
Spontaneous spending on non-necessities might seem harmless… until you look at the numbers. Creating a budget can give you an eye-opening look at what you’ve been prioritizing, and whether it’s aligned with your goals.
3. Create Motivation
With the help of a budget, you get to see exactly what it will take to become debt free. As you track your budget and see your debt balance getting smaller each month, your sense of accomplishment and excitement can make it that much easier to pass on items you don’t need.
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Budgeting Methods That Help With Paying Off Debt
If you’ve tried and failed at following a budget in the past, consider it a lesson in what doesn’t work for you. This time around, you may find one or more of the following methods better suited to your goal of paying off debt:
Prioritize High-Interest Debt
Accelerate your progress toward debt payoff by incorporating the debt avalanche method into your budget. With this method, you cover the minimum payments due on each of your debts, but allocate extra cash to the debt with the highest interest rate. Once that account is paid off, roll the monthly payment toward the account with the next highest rate, and continue that pattern until all of your debt is eliminated.
By using the debt avalanche method, you’ll reduce the overall interest charges you accrue on your debts, which saves you money and shortens your debt payoff timeline.
Make Short-, Mid- and Long-Term Cuts
It may sound counter-intuitive, but pinching pennies only gets you so far. It’s difficult to sustain a budget (and your well-being) if you squeeze every ounce of spending out in order to pay off debt. Instead of creating a plan that runs you into the ground, try applying different types of cuts to your spending. For example:
- Immediate cuts: Find throw-away costs you can easily and immediately eliminate, like recurring fees for memberships you don’t use.
- Temporary cuts: For non-necessities that you struggle to cut, start by eliminating them on a temporary basis, even if it’s just for a few months.
- Permanent cuts: If a spending category isn’t serving your financial goals, meeting a need or adding to your quality of life, consider cutting it permanently. These categories may include gambling, fast food, luxury apparel or last-minute vacations.
Reinforce Your Spending-Limits
Creating a budget doesn’t always translate to new spending habits, but these extra steps can help you put your spending plan into action:
- Set a daily or weekly spending limit: Calculate your total monthly budget for day-to-day expenses (such as gas or work lunches) and divide it by the number of days or weeks in the month to give yourself an average daily/weekly spending cap.
- Switch to cash only: Put yourself on a cash-only spending basis by carrying only the amount of cash you’ve budgeted for the day or week. You can also use the envelope method, which involves putting a set amount of cash into labeled envelopes that correspond with your spending categories.
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Budgeting Tools That Can Help With Debt Payoff
A wide range of free and paid budgeting tools can help you pay off debt. The best option for you depends on how much you’re willing to pay and how much time you want to invest into the tool. Here are a few to consider:
Budget Templates
Lots of online budget templates, like this one from the Federal Trade Commission, are free and user-friendly. The downside is they can over-simplify your budget by omitting lots of line-items. But you can leverage them by plugging the line-items into a spreadsheet and adding your additional spending categories.
Debt Payoff Calculators
Free debt payoff calculators, like the one on Calculator.net, can show you your debt-payoff date and help you see how that date and your overall interest charges will change if you adjust your payment amounts.
Complimentary Tracking
Many bank and credit card accounts come with some form of complimentary budget tracking. These tools tend to track a limited number of spending categories, however, so they aren’t a replacement for a real budget.
Budget Apps
Free budget apps, like the forthcoming CreditU app from American Consumer Credit Counseling, can help you track your spending and debt-payoff progress. Just note that most apps aren’t effective unless you invest some time connecting your spending accounts and categorizing your transactions correctly.
Credit Counseling
Nonprofit credit counseling agencies offer professional budgeting and debt management support, including Debt Management Plans (DMPs), which are payment plans that can involve lower monthly payments and/or lower fees on your debt accounts.
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