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6 Steps to Creating a Budget that Makes Debt Reduction Doable

Yes! You can maintain a budget, pay down your debt AND have a life.

March 15, 2021

Psst, we've got a little secret to let you in on. But before we do, we first want to reiterate — if it isn't already obvious — that we're not the biggest fans of debt. We’re not talking about “good” debt like a manageable mortgage, but the kind of debt that makes you want to crawl under your covers and stay there. Even though getting rid of debt can feel like an impossible mountain to climb, with the right plan in place, debt can be paid down without disrupting your day-to-day life too much. As far as the secret goes — the key to making debt seem a whole lot less intimidating is knowledge. 

Knowing how you’re going to pay down your debt and when you’re going to do it usually makes the process go a whole lot smoother. Let’s walk through creating a budget that keeps debt reduction in mind. 

Step 1. Identify Where Your Money Comes From

First things first, in order to know what you have available to spend each month, you need to know exactly how much money you’re bringing in. Take some time to jot down all of your regular income sources. For some people, this might not take too long. If you’re a single-income household it’s easy to figure out what you bring home each month. In some cases though, you may also need to consider other income sources like:

  • Side income. If you make freelance, side-hustle, or gig-economy money, include a general estimate of your earnings. 

  • Both spouses' income. If you’re married and share your finances, take note of your combined take-home pay.

  • Child support or alimony.

  • Government benefits.

Step 2. Identify Where Your Money Goes

Once you have a firm idea of how much money is coming in, you have to look at how much money is going out on a typical monthly basis. This will probably be the most time-consuming part of the budgeting process. Going through your monthly bills and past bank statements to see what you’ve been spending your money on is a good way to do this. If you tend to pay in cash, keeping a spending log for a few weeks will allow you to get a clearer picture of how you spend your money. Write every single expense down. Now is a really good time to start thinking about where you can cut non-essential expenses from your budget (hint: those subscription services and takeout meals can really add up fast). 

Step 3. Note All Bill Amounts and Due Dates — Including Debt Payments

Wouldn’t it be nice to wave a magic wand and make all bills disappear? It’s a nice fantasy, but bills are one of those things that life reliably throws your way. Your bills will be an important part of your budget because they have to be paid each month. 

Create a budget by accounting for which bills you need to pay. 

  • Housing costs — rent or mortgage.

  • Debt payments like a student loan or auto loan, which are typically fixed amounts.

  • Bills that usually vary from month to month, such as utility bills like water, electric, or phone.

  • Expenses that vary in cost and don’t have due dates like other bills — groceries, gas, and miscellaneous household expenses like personal hygiene items and household cleaners. 

Non-essential expenses are also important to account for in a budget. What’s non-essential to one person might be very essential to another. This category tends to be personal and incorporate things that are an important part of living a happy and healthy life, whatever that means to you. But when you’re paying down debt, you might need to cut back on some of those expenses to make more progress quicker. The less you spend on interest now, the more money you have for that future dream vacation.

When budgeting for your debt payments, whether it be credit card debt, student loan debt, or some other form of debt, it can be helpful to note the interest rates you’re paying as a friendly reminder of how much your debt is really costing you. 

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Step 4. Pick a Budgeting Method That Works for You

While there is no one-size-fits-all approach to budgeting, especially when you’re focused on debt reduction, there are a few go-to methods that many people have found success with. That being said, this is your budget — no one else’s. Feel free to alter these ideas until they work for you. The key to creating a successful budget is finding a method that you can stick with. If one of these budgeting options seems too fussy for you, chances are you won’t find it easy to keep up with. 

The Zero-Balance Budget

This type of budget is a classic form of budgeting. Main expenses are grouped into categories like “utilities” and “transportation.” Then a target spending amount for that category is assigned. Ideally, your total expenses for each category will come in at or below the target amount. This budget allows for a bit of flexibility while keeping you accountable to your spending. 

The Envelope Budget

A budget envelope is ideal for anyone who is prone to making impulse purchases or really needs to stick to a tight budget. At the beginning of each month, or each time you get paid, withdraw cash in the amount of your paycheck. Sort the cash into multiple envelopes marked by category, like “food” or “transportation.” The cash you put into each envelope is how much you can spend on that specific category. If you want to spend more than what’s in that envelope, you’ll need to borrow from another category, which will then lower how much you can spend on that category. For example, if you want to spend more on entertainment than you budgeted for and take money from the food envelope to cover the extra expenses, you’ll need to cut back how much you spend on food that month. The envelopes are refilled each time you have income to withdraw from your bank account, and you start the cycle over again.

The 50/30/20 Budget

A 50/30/20 budget is very straightforward. You’ll spend a certain percentage of your income (50%, 30%, and 20%) on a certain type of expense. 

  • 50%: basic living expenses.

  • 30%: wants (aka non-essential expenses).

  • 20%: saving for the future. 

This budgeting method was popularized by Sen. Elizabeth Warren’s book “All Your Worth: The Ultimate Lifetime Money Plan.” Following this plan allows savings to grow quickly, but some people might find it difficult to reduce their living expenses to no more than 50% of their budget. 

Step 5. Incorporate Debt Payments Into Your Budget

Now that you know what you earn, how much you spend, and what budgeting method appeals to you, you can create your monthly 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.

Step 6. Find a Support System

Despite how it can feel, paying down debt isn’t impossible. But it can be hard and it can feel lonely. Finding a support system to help you stay on track is key. Have open and honest conversations with your romantic partner, best friend, or family members. Explain what you’re hoping to achieve and how they can help you meet your goals (fewer pricey, bottomless brunches and more backyard BBQs please!). Finding a support system will not only make you feel less alone in your debt journey, but it will help keep you accountable. 

Need an ally in your quest to become debt free? Tally is here and ready to help you manage your credit card debt. Learn how you can save money on interest and start paying down your credit card debt even faster.