How to Budget to Pay Off Debt

If you owe more money than you can realistically pay off, working with a credit counselor or professional debt relief company could be your best option. Debt settlement could help you get rid of your debt for less than you owe, faster than by slogging it out with minimum payments.

If your debt is at a manageable level, though, you probably can pay it off on your own.

Debt payoff tends to go smoother when you have an action plan. For most people, this starts with creating an effective budget. 

If you're not sure how to budget to pay off debt, this guide should help you make it happen. Just follow these steps, and you could be on your way to debt freedom in no time.

1. Track Your Spending First

The first step in making a debt repayment budget is to figure out where your money goes now. You need a realistic idea of your spending habits. That way, you won't set limits in your budget that don't make sense for your needs. 

Tracking your current spending also allows you to see what you're spending too much on. You can use this information to make cuts and free up money for debt payoff.

You can manually write down how much you spend, look back at past credit card and bank statements, or use a budgeting app. The idea is to get a baseline for where your money is going so you can make a budget that works. 

One month of tracking will tell you a lot. Three months will show you your spending patterns. A full year of tracking will give you great insight that you can use.

2. Decide What Kind of Budget Makes Sense for You

There are many different approaches you can take to create a budget.

For some people, a simple plan like a 50/30/20 budget makes sense. This directs you to spend 50% on needs, 30% on discretionary costs, and save 20%. However, when you're trying to pay off debt, you may need to be a little bit more detailed. You want to make sure as much money as possible is going to your creditors, so thinking in percentages may not cut it.

To set yourself up for success, make a detailed zero-based budget that gives every dollar a job. Your spending, saving, and debt payoff should add up your total income. And you should set caps on specific kinds of spending, such as deciding how much you can afford for expenses like food and entertainment.

Creating a detailed budget allows you to clearly see how much you can put toward debt payment. It also helps you make spending cuts in other categories to increase the amount you send to creditors.

3. Treat Debt Payoff as a Top Priority

As you make your budget, you need to treat debt payoff as a key priority. You don't just want to make minimum payments. It will take forever to become debt-free if you do. 

Instead, commit to paying at least a little bit extra—and ideally a lot extra—to your creditors each month. You should treat debt payoff as an essential bill, along with things like your mortgage or rent. Assign as much money as you can to paying off debt before you spend money on fun things like dining out.

If you sacrifice for a little while and get serious about paying off debt, you can probably save a lot of money on interest and get out of debt much more quickly. 

4. Aim for a Big Spending Cut You Can Redirect Toward Debt

You can and should try to cut as much as you can from other spending when you're paying off debt. You might be able to save hundreds of dollars each month with a few small changes.

It's hard to sustain a lot of small sacrifices over the long term. After all, constantly passing up fun spending can start to feel really frustrating. Try making one bigger cut to free up money to pay off debt, rather than lots of little ones. For example, you could cancel your gym membership or downgrade to a bare-bones cell phone plan with one quick move. 

If you can find one or two big short-term spending changes, those should go a long way toward freeing up room in your budget to pay debt. This move will greatly increase the chances you'll stick to the plan.

5. Bring In More Money

What if there just aren't any more line items you can cut out of your budget? Speed up your debt payoff plan by adding more income. You could ask for more hours at work, get a side job, sell your stuff, or rent out your garage. Every extra dollar puts you closer to your goal.

6. Find Ways to Stay Motivated

Finally, you'll need to find a way to stay motivated when paying off debt. This is important so you don't go over budget because you're frustrated it's taking so long. 

There are lots of motivation techniques you could try. You could create a visual tracker for your debt, like a paper chain you take links off of as you make payments. Or, you could play debt bingo using a bingo card that includes different amounts for extra payments, such as $50 or $75. Each time you make one, mark it off on the card to try to get bingo.

If you can stay motivated and work with a realistic and detailed budget, you could be on the path to debt freedom faster than you'd think.