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When you're trying to pay off debt, sticking to a budget can help you reach your goals faster. You'll be able to cut back on nonessential expenses and redirect that money to credit card and loan payoff. You can even set up monthly transfers so debt payoff happens automatically.
A budget also lets you concentrate on debt repayment while ensuring you don't ignore other important financial priorities. It gives you structure, a method to allocate money to emergency savings, and a clear way to reward yourself for making progress.
Here's how to set up a budget and use it to reach debt freedom as soon as possible—plus debt consolidation options, such as personal loans or balance transfer cards, that you may want to explore if budgeting isn't enough to pay off your debt.
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:
- Write down your monthly after-tax income so you can see exactly how much money you have to work with.
- 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.
- 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.
- 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.
There are a couple of approaches you can take when putting extra money toward your debt:
- 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.
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.
How to Pay Off Debt on a Tight Budget
Even with careful trimming, your budget may not reveal much extra money to redirect toward debt beyond the minimum payments you're already making. In that case, you may want to explore other ways to restructure the debt itself so you can make faster progress toward paying it off. These include:
Debt consolidation loan: A debt consolidation loan is a type of personal loan that combines multiple debts into a single monthly payment, ideally at a lower interest rate. Because the loan has a fixed interest rate, interest won't snowball the way interest on revolving credit card balances can. Having good or excellent credit scores can help you qualify for the best interest rates and terms, although there are debt consolidation loans for borrowers with less-than-stellar credit.
If there's not much room to spare in your budget, choosing a longer loan term can make payments more manageable while still saving money compared to your credit cards. Choose a loan with no prepayment penalty so you can make extra principal payments when your budget allows or pay off the loan early if your financial situation eases up.
- 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.
- 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.
Learn more: What's the Best Way to Pay Off Debt?
The Bottom Line
Setting up a budget is a powerful way to bring a sense of order to paying off debt. Think of your budget as your partner in debt repayment. It provides the opportunity to identify a monthly payoff goal and strategies for how to free up money to meet it.
If your budget doesn't have much wiggle room, consolidating your debt with a personal loan is an alternative to consider. You can compare loan offers from multiple lenders on Experian's loan comparison platform, which matches you with personal loans based on your credit profile. Within the loan comparison marketplace, Experian's No Ding Decline™⊛ feature lets you apply for certain personal loans using a soft pull, so your credit scores aren't impacted if you're not initially approved.
⊛Applying for loans labeled No Ding Decline™ won't hurt your credit scores if you aren't initially approved. Initial approval and/or acceptance of this loan may result in a hard inquiry, even if you're unable to pass final verifications, which may impact your credit scores.