When you’re in debt, worry and anxiety can follow you everywhere. While a budget won’t magically erase your debt overnight, it can help you outline a solid plan toward repayment.
Before you sit down to create a budget, know your options.
Take Stock of Your Finances
Take some time to understand your full monthly financial picture, including your debts, balances, and interest rate. It can be hard to track where you’re spending each month, so try using a tracking app for 30 days to get a handle on where you need to pull back.
You can also use CC of Minnesota's Budget Percentage Calculator to compare your current spending with suggested budget ranges.
If you want a clearer picture of how much of your income is going toward debt, the Debt Ratio Calculator can also help.
Find a Budgeting Method That Works for You
Experts recommend several different ways of budgeting that can help keep you organized and on track:
- Zero-Based Budgeting: With this budgeting technique, you give every dollar a job for the month, leaving you with zero dollars after all expenses and savings have been taken out.
- 50/30/20 Rule: This technique provides specific direction on where the percentage of your monthly take home should go. Here’s the breakdown:
- 50% of your monthly take-home goes toward your household expenses, like rent/utilities, groceries, auto loans, and the minimum payment on debt repayment.
- 30% goes to recreation or the fun stuff in life, like eating out, entertainment, subscriptions, and shopping.
- The final 20% goes toward paying down your debt, savings, and an emergency fund.
- Envelope Method: Take envelopes and label each one with a different category of expenses, then you put your cash in the envelope. Once the money is gone from each category, you stop spending until the next month. This method is more outdated, given we live in an increasingly cash-free culture, but it could work for people who want to track recreational spending in a tangible way.
There is no single budgeting method that works for everyone. The most effective budget is one you can realistically follow month after month.
CC of Minnesota also offers additional information about credit, budgeting, and money management to help you build a financial plan that fits your situation.
Streamline Your Spending
Knowing where your money is going each month can give you a better perspective on what you can reduce.
Start by separating your needs from your wants. Subscriptions, restaurant meals, entertainment, shopping, and other discretionary expenses may be areas where temporary changes can free up additional money for debt repayment.
You don't necessarily need to eliminate every enjoyable expense. Instead, look for sustainable reductions that allow you to consistently put more money toward your balances.
Find a Debt Strategy That Works For You
Here are some tried and true methods for repayment:
- Debt Snowball: This strategy has you tackling your smallest debt first, paying only the minimum on everything else, until it's gone. Then you roll that payment into the next-smallest balance, and so on until your debt disappears.
- Debt Avalanche: The avalanche method follows the same basic structure, but it changes the order of repayment. Instead of targeting your smallest balance, you go after the debt with the highest interest rate first. While you won’t pay it down as fast, it typically saves you more money overall.
- Hybrid Approach: You can combine the two by eliminating a small debt early for motivation, then shifting focus to your highest-interest balances for greater savings.
CC of Minnesota provides several debt repayment calculators that can help you compare different payoff scenarios, including accelerated repayment and debt payoff goals.
Automate Your Payments
Automating at least your minimum payments can help ensure your bills are paid on time and reduce the risk of late fees and penalties.
You may also want to schedule a monthly budget check-in. Compare what you planned to spend with what you actually spent, adjust problem categories, and determine whether you can increase the amount you're putting toward debt.
As you pay off individual balances, consider redirecting those old payments toward your remaining debts rather than adding that money back into your regular spending.
Still Struggling? Explore Debt Management Options
Sometimes budgeting alone isn't enough, particularly when high interest rates make it difficult to reduce your credit card balances.
If you need additional help, Credit and Budget Counseling through CC of Minnesota can give you the opportunity to work with a certified counselor who can assess your budget, discuss possible changes, and help you develop an action plan for your finances. CC of Minnesota is a nonprofit credit counseling agency and offers counseling and financial education services.
Depending on your situation, another option may be a Debt Management Program.
With a Debt Management Program, you make one monthly payment to the credit counseling agency, which then distributes payments to participating creditors. Depending on your creditors, the program may also provide benefits such as reduced interest rates, helping more of your monthly payment go toward paying down your balances.
You can also explore My Virtual Counselor to get an idea of how much you may be able to save through a Debt Management Plan before meeting with a counselor.
Bottom Line
If debt is becoming difficult to manage, remember that you have options. Creating a realistic budget, reducing unnecessary spending, and choosing a structured repayment strategy can help you begin making measurable progress.
And if your balances aren't coming down despite your efforts, you don't have to figure out the next step by yourself. CC of Minnesota offers nonprofit credit counseling, budgeting assistance, financial education, and debt management options designed to help people regain control of their finances.