How to Budget Paying Off Debt

Write the biggest check to your highest-interest account.

Debt feels heavy when the bills keep coming and you struggle to pay them every month. You can lift that weight with a budget geared toward paying off your debts effectively. A sound repayment plan means cutting back in other areas, but temporary sacrifices pay big dividends in money saved on interest charges, a smaller debt load and a better credit rating. Your balances will eventually dwindle to zero if you make and stick to a realistic budget aimed at getting you out of debt.

Things You'll Need

• Credit card statements
• Paycheck stub

Instructions

1. Place a moratorium on using your credit cards and getting new loans. You cannot create and successfully implement a payment plan if the figures in your budget keep changing because you keep adding more debt. Limit yourself to using each card once every six months for a necessity that is paid off immediately, so your creditors do not close them as inactive accounts.

2. Make a list of your money outflow for the past several months. Include necessities like your rent or mortgage payment, utilities and food, as well as optional items like restaurant meals, coffee shop visits, DVD rentals, convenience items and impulse purchases. Use your credit card receipts to help you remember as many expenditures as possible.

3. Write down a new budget that cuts out every possible optional item. Paying off debt requires a monthly commitment of as much money as you can afford. Carefully distinguish things you want from expenses you cannot live without. True necessities include food, clothing and shelter, MSN Money advises. Add up your unavoidable expenses, then subtract this amount from your income to determine how much money is left over for debt repayment.

4. Read your credit card statements and other bills to pinpoint the account with the highest interest rate. Pay the minimum requirement on your other accounts, and put all the extra money toward that bill. Take the extra funds in your budget and focus them on the account with the next highest interest rate once the initial account balance reaches zero. Repeat this strategy until your debts are completely paid off.

Tips & Warnings

• Work with a nonprofit credit counselor if you cannot make a manageable debt repayment budget on your own, the Federal Trade Commission advises. Counselors offer budgeting assistance, and even make and administer structured plans if you cannot manage your finances on your own.

• Do not cut items from your budget that might cost you more money in the future at the expense of short-term savings. For example, MSN Money warns that neglecting your vehicle's oil changes might lead eventually to expensive engine repairs. Paring down your home or car insurance coverage means more out-of-pocket expenditure if you get into an accident or have a household disaster.

References

• MSN Money; Your 5-Minute Guide to Budgeting; April 2010
• The Motley Fool: 9 Ways to Pay Off Debt
• MSN Money; Four Expenses You Shouldn't Cut; April 2010
• Clark Howard; Cycling Your Unused Credit Cards Back into the Mix; July 2008
• Federal Trade Commission; Fiscal Fitness, Choosing a Credit Counselor; February 2010

Resources

• Consumer Credit Counseling: How to Make a Budget and Save Money