If you’re wondering how to pay off your debt, you’re not alone. Americans carry an average debt balance of $96,371, including credit card balances, car and student loans, mortgages, etc., according to credit bureau Experian’s latest data. There are many tips out there to help fit debt reduction into your budget.
For debt of any kind to be manageable, you need to have a plan to pay it off. That’s especially true when high-interest debt balloons out of control. It can be overwhelming to know where to start, but sometimes you simply have to begin.
Paying off debt requires a great deal of motivation, but a good budget can help you pay off debts faster. Your best strategy for budgeting to pay off debt depends on your specific financial position. However, no matter how you approach it, throwing extra money at your debt can lead to more flexibility in your budget.
Prioritize Which Debts to Pay Off First
Not all debt is bad debt, but some forms are worse than others. Some types of debt are necessary to help you achieve life’s milestones, such as getting a mortgage to purchase a home or taking out student loans to earn a college degree.
The two biggest pieces of information we’ll be focusing on involve your balance and interest rates, so at least make sure to get those two before proceeding. Having a budget in place might make this easier.
Create a Budget
Once you’ve identified the debts you want to target first, the next step is to create a budget that will work for you. Your budget accounts for all of the money coming in and going out each month. A good budget can help you make informed decisions as you create a realistic debt pay off plan.
The first step of creating a budget is to look at your income. Make a list of every income source, no matter how big or small, including income from unemployment and any side hustles.
Use a Debt Payoff Strategy
The debt snowball and debt avalanche methods are examples of debt payoff strategies that can make effective use of the money you have to pay off debt. With both strategies, you’re making the minimum payments on all of your debts. The difference is how you allocate extra money.
The debt snowball method builds momentum by focusing on small, early wins. You find the debt with the smallest balance and put any extra funds towards paying off that debt first. Once your smallest debt is paid off, you move to the debt with the next smallest balance. Paying off a debt in full early on can keep you motivated as you start getting closer to attacking debts with bigger balances.
Reduce Monthly Bills
Lowering monthly expenses frees up money that can be put toward paying down debt. Are there any unnecessary expenses that can be cut? Maybe drop Netflix or cable for a few months to save money and free up time for a side hustle. If the heating bills have been out of control, many utility companies offer free energy audits, which would identify changes you could make to curb utility costs.
Incorporate Debt Payments Into Your Budget
The key to creating a budget to assist with your debt reduction goals is to budget for your debt payments like any other bill you owe each month.
If you can afford to budget for extra payments each month, even better. The key is to make your debt payments an essential expense in your budget like you would for rent or food. While budgeting for non-essential expenses can add to your enjoyment of life, make sure your budget takes both your financial and personal goals into account.
Adjust Your Spending
You might want to keep at least one piece of plastic in your wallet, but you don’t need more than that. If you’re in debt, take a break from using your credit cards. You can cut back on overspending by doing things like cooking at home more instead of eating out or cutting back on entertainment activities. You can also do things like checking your budget for subscriptions you don’t use or using free resources such as libraries to check out books, movies and TV shows.
Remove your cards from your wallet and store them in a safe place. You should also remove them from sites where it’s easy to make online purchases. You’re less likely to use your plastic if it’s not readily available.
There are many different strategies to incorporate debt reduction into your budget and the above tips by no means have exhausted that list . Research the different approaches,to find a tactic that is likely to work best for you.
Remember making a plan to pay off debt is an excellent goal, but be kind to yourself. If something happens along the way and you need to adjust your strategy, that’s okay. These tips can help you create a realistic plan that sets you up for success and fuels your motivation to keep moving forward.
What is your debt reduction plan?