How To Beat Debt With A Budget and Regain Peace

When you’re trying to pay off debt, building and sticking to a budget is a must to help you reach your goals quickly. The most critical point you must know is that You Need A Budget (YNAB). You must cut nonessential spending and aggressively redirect every one of those extra dollars to credit card and loan repayment. To put this on cruise control, automate debt repayments with automatic transfers from your bank. This article will walk you through exactly how to beat debt with a budget and regain peace in the process.

Having a budget allows you to focus on paying down debt while still adhering to other financial priorities. It provides structure, a method for allocating money for emergency savings, and a clear means of monitoring your progress towards achieving goals as you watch your debt tumble and you start to build momentum. When this occurs, you begin to find more peace and breath easier, but now’s not the time to let up. You’re just beginning.

You Need A Budget, So Here’s Where To Start.

Here’s how to create a budget and utilize it to achieve debt freedom as soon as possible.

1. Set Up Your Budget

The first step in setting up a budget is to determine what type of budget you want to create. There are two types of budgets: fixed and flexible. Fixed budgets are based on a specific amount of money that comes in each month. Flexible budgets allow you to adjust your monthly income according to your financial situation at any given time. Pick the one best suited for you, then STICK WITH IT. That is your roadmap to success. But you have to know where you are financially before you can proceed. So…

2. Determine How Much Money You Can Spend Each Month

Once you’ve determined what kind of budget you’d like to use, you need to figure out how much money you can spend each month. Start by determining how much money you make per week. Multiply that number by 52 (the number of weeks in a year) to get your annual salary. Then divide that number by 12 (the number of months in a year) to find out how much you should allocate to your budget each month. If you’re not sure how much you earn each month, you can always ask your employer. Have a clear picture of your monthly income, then…

3. Calculate Your Monthly Expenses

Next, add up all of your monthly expenses. To get an accurate baseline, track your expenses for up to three months. Or check your account statements from the previous three months and bin your expenses into categories. Include everything from housing, vehicles (gas, insurance, maintenance), credit card bills, groceries, bills and utilities. Then add up all of these numbers together. Divide that total by 30 (the number of days in a month) or 90 (the number of days in three months if you tracked back three months) to arrive at your monthly expense average. For example: $3400/30 = $113/day or $10,800/90 = $120/day. Once you understand your daily and monthly budget, the next step is…

4. Subtract Your Monthly Income From Your Monthly Expenses

Now subtract your monthly income from your monthly expenses. Use the difference to determine how much money you can dedicate to paying down debt. Remember, you can only deduct certain expenses from your gross income. These deductions include taxes, child care costs, student loan interest, and medical expenses. The next step is where the action begins.

5. Pay Down Debt

After you’ve created your budget, you can begin paying down your debts. First, look at your minimum payment options. Most lenders offer different minimum payment amounts depending on your credit score and the amount of debt you owe. If you’re having trouble making your minimum payments, consider increasing your payments. If you’re unable to increase your payments, talk to your lender about lowering your interest rate. Most lenders will work with you to help ease the financial burden, so this is a win-win. Once you know the surplus of income you have to put towards debt, determine your margin between debt reduction and setting $1000 aside as an emergency savings.

6. Save Extra Money

Save money by cutting back on unnecessary purchases. Instead of buying that coffee and breakfast sandwich on the way into work, make your own at home and pack a lunch rather than eating out. Instead of buying expensive clothing, take advantage of online resellers or store discounts. Many retailers offer free shipping and discounts on their products. When you shop online, you can avoid impulse buys and save money. 

A rule of thumb before spending any money is to ask yourself, “do I NEED this?” And if the answer is no, resist the urge to buy it. If you still must have it, then check to see if it fits in the budget. If you need more money, check out this financial section on how to pick up a side gig or work from home. 

Fast debt payoff requires a budget.

Instead of hoping to adhere to a strict monthly spending limit, create a budget by dividing your spending into categories and allocating a certain percentage of your income to each category. For instance, the most common categories, or bins, are house, car, shopping, food, bills/utilities, entertainment, tithing or charity. Every dollar spent should fall within each of these categories. You can add more if you must to fit your particular situation, but generally speaking each dollar spent could fit nicely into these bins.

Build and adjust your budget as necessary, then redirect money toward your debt payments bucket so that you can contribute more than the minimum required each month. That $50 per month you save by cutting back on takeout, for example, can be used to pay down your credit card bills, which can save hundreds of dollars in interest over time. Renegotiating with creditors can free up some extra cash, which can be applied towards your priority debts based on your chosen strategy, which we’ll cover in the next section below.

Having debt repayment goals set for six months, one year, and 18 months can help you stay on track. Check in on your progress at least once per month or once per quarter. Log into your credit card or loan payment portal and see how far you’ve come. Set up an online debt management tracker that displays all your accounts so you can see your cash inflow and outflow in near real time. 

A handy, free tool to do this is with Intuit’s Mint App. To learn more about taking control of your finances, you can also explore software learning programs that will provide you with greater understanding of every smart money move to maximize your success. These are smart choices for anyone who wants to understand the theoretical to practical side of managing money, and may reinforce your understanding of cultivating healthy money habits now and into the future. 

If you’re more of a hands- on person that prefers a pen and paper, a super-helpful tool is a monthly budget and debt tracker. This is similar to a dream board that you can tape to the wall or hang on the kitchen refrigerator, and is a reminder for the whole family what the money plan is (and why everyone is tightening their belts).

Strategies to Win the War on Debt.

Debt snowball:

This debt payoff method requires you to make the minimum payments on all your debts except for the one with the smallest balance. Your extra money will be allocated to the smallest debt until it is paid off. Then you will target the next-smallest debt and so on until all of your accounts are paid off. This is the best strategy, simply because for the majority of Americans, money is emotional. 

One of the premier “get out of debt” experts Dave Ramsey states, “Everyone’s trying to fix their finances with a math formula, and if you were doing math you wouldn’t be in credit card debt.” How true is that! The debt snowball method works because it generates momentum quickly, and this momentum will motivate you to stay the course, or maybe increase your debt repayment by reducing your nonessential spending even further.

Debt Avalanche:

This method consists of putting extra money towards 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. By using this strategy, you’ll save more on interest than by using the debt snowball method, but it could take longer to see progress.

Both the debt snowball and debt avalanche are considered DIY methods. To learn more about both strategies, check out the National Foundation for Credit Counseling.

Credit Card Balance Transfer:

If you qualify for a 0% introductory APR credit card balance transfer, you can transfer your existing credit card balance to a new card and pay off the loan at 0% APR for a period of time. However, keep in mind any fees, such as balance transfer fees and APR, will increase after the introductory period. So aim to pay off the transferred debts during the introductory APR period. This method requires discipline and careful planning, so be mindful if this method is for you or not. If not, the “set it and forget it” debt snowball or debt avalanche may be better suited for you.

Debt Consolidation Loan:

Like a credit card balance transfer, a debt consolidation loan allows you to consolidate several debts into one, preferably with a low interest rate. A type of personal loan, consolidation loans are best for borrowers with good or excellent credit scores. A high score gives you access to the best interest rates and terms. Be aware that borrowing money (the loan) to pay off borrowed money (the debt) is risky. This is especially true if you don’t have a good track record with managing personal finances. You could inadvertently dig yourself into deeper debt if you’re not careful.

Refinancing:

You can lower the interest rates on individual loans, such as student loans, car loans, and mortgages, by refinancing. Doing so will help you pay off your debt faster by directing more of your excess cash toward principal instead of interest. For example, student loans can be refinanced through banks and other private lenders. The private lenders will use your credit score and financial profile to qualify you with a new or possibly lower interest rate. Be careful since refinancing federal student loans means losing important federal protections like income-driven repayment. Also with refinancing, you’re borrowing more money to pay for borrowed money, and so this method is not ideal. Again, if you were doing math, you wouldn’t be in debt. Money is emotional, and so you need to invest your emotion into practical solutions that achieve tangible results of eliminating debt (not taking on more debt).

Find a Plan and Stick to It.

Having a budget is a great way to organize debt repayment. Your budget should function as your partner. Identify a monthly debt repayment goal and the strategy that works best for you, and then reduce your spending to free up money in order to accomplish your goal of eliminating debt. Doing so will help you get debt out of your life, and probably sooner that you realize once the momentum picks up. And let me tell you, that moment is a rush and will motivate you to double-down on your efforts to eliminate debt even quicker. 

But whatever debt elimination plan you develop, you must stick with it until the debt is gone. Trust me, it is worth it, and your future self will thank you mightily. The best part of eliminating debt is that you will begin to breathe easier, and experience greater peace knowing that you are on the path to financial freedom. And with one less stressor in your life, you can regain clarity and focus on the important things in your life without cloudy judgment or uncertainty. That is what breaking free from the bondage of debt will feel like. Now what’s holding you back from starting? You’re not getting any younger.

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