How do you budget to pay off debt?

One way to budget when your objective is to pay off your debt is called the 70/20/10 rule. This requires you to allocate 10% of your income to paying off debt, 20% to savings and the remaining 70% to your monthly bills and discretionary spending.

Making your debt payments right after getting paid can also ensure that you prioritize them and don’t run out of money before spending the full 10%. If there is room in your budget, you can also allocate more than 10% of your income to paying off debt.

How to Make a Budget to Pay Off Debt

1. Calculate 10% of your monthly income.

Add up all your sources of income including your paycheck and any supplemental income you have, such as Social Security or alimony payments, then multiply that number by 0.10. This is the amount you should pay toward your debts every month, at a minimum. For example, if you make $5,000 a month, you will allocate at least $500 to your debts.

2. Keep your monthly expenses below 70% of your monthly income.

Make a list of everything you spend your money on each month, including your necessary expenses like groceries and rent, and your discretionary spending. You can look at past bank and credit card statements to get a sense of your spending and see what percentage of your income your typical monthly expenses account for.

If they add up to more than 70%, you should look for ways to reduce your discretionary spending. If you’re not spending the full 70%, you can use the leftover funds to make extra payments on your debts.

3. Figure out how much you owe.

Write down all your outstanding balances on any credit cards, personal loans or any other debt you have. It can also be useful to list the due date, the minimum payment required, and the interest rate for each of your debts.

4. Come up with a debt pay off plan.

Once you have some funds to make extra payments toward your debt, you’ll want to come up with a plan to pay it off. If you have multiple debts that you are trying to pay off, there are two main approaches you can take.

• Avalanche method: With this method, you will put extra payments toward the debt with the highest interest rate first since it is the one that will cost you the most in the long run. Once you pay that balance off, you can move to the debt with the next highest interest rate.
• Snowball method: The idea is you’ll put the extra payments toward the debt with the smallest balance first. Once that’s paid off, you will tackle the debt with the next smallest balance.

It’s important to note that for both the avalanche and the snowball methods, you should still be making the minimum required payments on all your debts. Missing a payment can negatively affect your credit score and cause you to pay late fees.

5. Review your budget and adjust.

Review your budget regularly to check the progress you are making with your debt. You should also adjust your budget every time you pay off a balance, so you can determine what to do with the funds that you are no longer using to make those debt payments.

To learn more, check out WalletHub’s guides on how to make a budget and the best way to pay off debt.