Money is a finite resource. It runs out. If you’re on a debt repayment journey, you’ve probably noticed that by the end of the month, you’re often left with less cash to put towards your debt than you might have expected or planned for. The question then becomes: How will you ever fully be out from under the burden of debt if you’re only able to pay the minimum? If you want to experience true financial freedom, you’ve got to get on a budget that can help you free up some wiggle room every month to get rid of debt once and for all.
Unfortunately there isn’t a “best” way or a “one-size-fits-all” approach to budgeting when you have debt. But thankfully there are some excellent budgeting methods to help you be the most effective when attacking your debt. Some popular methods include proportional budgeting and zero sum budgeting that can help you line up all the little details on your finances and see the big picture on exactly what you can afford every month. Here’s a breakdown on both of those, and a look at how you can speed up your debt repayment results, ASAP. You got this!
Proportional budgeting is all about breaking up your budget into bite-sized pieces that you can easily visualize and understand. Perhaps you’ve heard people talk about “50-30-20” budgeting, or even “10-20-60.” No matter the numbers you choose to allocate, the goal is that you categorize your expenses, and once you max out each category, then it’s time to cut off that area of spending. I’ll explain using 40-30-30, since that option is often popular with people looking to pay down their debt quicker.
So, let’s say you made $3,000 per month after taxes and you want to build a budget. The rules of 40-30-20 are simple:
- 40% goes to your needs. So, $1,200 on rent, car note, cell phone, insurance, etc.
- 30% goes to your wants. So, $900 on clothes, meals out, netflix and other non-essentials.
- 30% goes toward saving, investing and paying down your debt. So, you’d have $900 total to put towards retirement, your emergency fund, and your debt. Depending on how aggressively you want to pay down debt, perhaps you put $600 towards debt, $200 towards retirement, and $100 towards your emergency fund. Or you could allocate $500 towards your debt, $300 towards retirement, and $100 towards your emergency fund. It’s all up to you, and you can put the numbers into a calculator to see which number will allow you to reach your goals faster.
This budget is best for those wanting to keep things as simple as possible. With that said, if you’re a more meticulous type of person who wants a category for everything, this budget doesn’t allow for intricacies. Really, this budgeting method comes down to two simple questions:
- Is this item a need or a want?
- How much can I afford to invest/put towards debt?
A zero based budget (admittedly one of HerMoney’s favorites) is a budgeting method wherein you give every single dollar a name and a place to go. At the end of the month, you’ll total everything up (your spending, savings, investments, etc.) and you’ll be left with $0. This does NOT mean you’ve spent every dollar — far from it. It just means you know where every single dollar is going. Every penny has a home, and you’re in control of all of it. With this method of budgeting, every expense each month gets recorded and categorized. When you use this approach, you can see from month to month just how much you’re able to save and throw towards your debt. Also, you can easily view just how much you’ve spent in your other categories that you could’ve perhaps trimmed, and thus eliminate your unnecessary expenses going forward.
This method is ideal for the meticulous budgeters — the ones who want to see each dollar and know exactly where their expenses are going. It’s much easier to make budgeting goals for each month when you know how much and where your expenses came from in prior months.
How can you decide between these budgeting methods?
Honestly, give them both a try and see which one works best for your lifestyle, habits and brain. ”An effective way to find the right budget to pay off your debt faster is to experiment,” explains Mason Miranda, credit industry specialist at Credit Card Insider. “When experimenting, remember that it may take some time to find the right balance between putting plenty of money towards debt, paying bills, and using any leftovers as fun-money.”
The bottom line with budgeting is there is no exact science because everyone’s finances are different. Also, your financial situation will change over time (sometimes even suddenly) and these changes will warrant adjustments to your finances and possibly your overall budgeting method.
How can you speed up the debt repayment process, and start seeing results?
The most effective way to see results is to pay as much as you can towards your debt — if you only pay the minimum, it’s just not enough to move the needle. When you’re paying only the minimum, you’re spending all your money on the interest you owe, leaving virtually nothing for your principal.
Start by figuring out which of your debts are the highest interest. Start by paying those down first. Then, look to the “avalanche method” to get rid of your debt faster. With this method, you put the majority of your money towards your highest interest debt, while continuing to pay at least the minimum on any other balances you have. Once the highest-interest balance is paid off, then you’ll move onto the card with the next-highest interest balance, and work your way down the line until you’re debt free.
Is there an exact process that makes one debt payoff plan better than another?
Debt paydown is an individualized process and cannot be broken into an exact measurement, since everyone’s income and debt levels are different. With that said, there are some guidelines that everyone can follow to find your best budget fit, and start tackling your debt on a bigger scale.
For starters, have an emergency fund! Never underestimate the small unexpected expenses that may come up in life and derail your carefully laid-out budget. You don’t want to put every penny of your cash towards your debt, because if you end up with $0 set aside for an emergency, then you’re only going to find yourself further in debt. (Try to work towards having 6 week’s of living expenses set aside for an emergency, and remember that starting small is okay!)
Also, know your numbers. Take into account EVERYTHING that costs you money each month. (No, Starbucks is not why you’re broke, but if you’re pretending that $5 daily latte doesn’t exist as part of your budget, you’re fooling yourself.) Comb through your bank statements and credit card invoices. See where you might be missing money, and make note of it.
Lastly, be deliberate in your finances. Don’t turn your budget on and off out of convenience, or when you feel like “splurging.” If you save for the splurges, you’ll always be ready to have some fun. And there’s no better feeling than that.
Yes, paying down debt (particularly if you’re doing it aggressively) can be hard at first. Maybe the numbers are big, and the interest is scary… we get it. But the key is repetition and knowing your numbers. Once you stop guesstimating on where your finances stand, you’ll know exactly where you stand and how best to move forward. You got this.
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- HerMoney Podcast Episode 271: Budgeting Without Tears
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