Worrying constantly about debt can be exhausting. Making a personal budget that works for you is an important part of debt repayment. It not only gives you a jumping point to start repayment, it gives you a concrete plan.
When creating a budget, it’s important to understand your finances, your budgeting options, and the different strategies you can use to tackle your debt.
Take Inventory of Your Finances
Dedicate some time to fully understand your finances and where your money is going each month. Start by listing your income, regular expenses, debts, balances, interest rates, minimum payments, and due dates.
To get an even clearer picture, try tracking your spending with an app or other budgeting tool for 30 days. This can help you identify spending patterns and areas where you may have room to cut back.
CCCS of Chattanooga also offers financial education and resources covering budgeting, debt management, credit, financial goals, and other money-management topics.
Find the Right Budgeting Method
While there are a number of ways to budget, here are some methods that are known to work:
- Zero-Based Budgeting: This method gives every single dollar a job. Once you've accounted for expenses, debt payments, and savings, subtracting all payments from your monthly income, you should have zero left.
- 50/30/20 Rule: This method splits your take-home pay into three percentages:
- 50% covers your essentials, including rent or mortgage, utilities, groceries, auto loans, and minimum debt payments.
- 30% goes toward the things that make life enjoyable, like dining out, entertainment, subscriptions, and shopping.
- 20% is dedicated to debt payoff, savings, and building an emergency fund.
- Envelope Method: With this method, you divide cash into labeled envelopes, one for each spending category. When an envelope is empty, that category is closed until next month. It may not be the greatest fit in today's largely cashless world, but it can still be a useful tool for anyone who wants a tangible way to control their discretionary spending.
The right method is ultimately the one you can realistically stick with. If you need additional guidance, CCCS of Chattanooga provides resources to help you learn more about credit and budgeting.
Know Where to Cut Your Budget
When you take a look at your expenses, decide where you can cut back—typically in the “wants” category where your discretionary spending goes.
Subscriptions, restaurant meals, entertainment, shopping, and other nonessential purchases are good places to look for savings. You don't necessarily have to eliminate everything you enjoy. Instead, focus on sustainable changes that free up money you can consistently redirect toward debt.
Repayment Strategies
Here are a few proven repayment strategies to consider:
- Debt Snowball: Start with your smallest balance, putting only the minimum toward everything else, and get rid of it completely. From there, take what you were paying on that debt and apply it to the next-smallest balance, repeating the process until every debt is gone.
- Debt Avalanche: This method uses the same structure as the snowball, but your priorities are different. With the debt avalanche, you focus on the debt with the highest interest rate first. You'll generally save more money in the long run since less of your money goes to interest.
- Hybrid Approach: Combine both in a way that works for you. Pay off one small debt first for a quick win, then pivot to targeting your highest-interest balances to save more money over time.
Hold Yourself Accountable to Your Budget
Automating your minimum payments can help ensure bills are paid on time and reduce the risk of late fees. But automation is only one part of staying accountable.
Schedule a regular budget check-in to compare what you planned to spend with what you actually spent. If one category consistently goes over budget, adjust it rather than abandoning your budget altogether.
And when you pay off a debt, consider redirecting that payment toward your next balance. You've already built that payment into your budget, so keeping it dedicated to debt can help accelerate your progress.
Need Help? Look Into a Debt Management Plan
Sometimes even a carefully planned budget isn't enough, especially when you're dealing with high credit card interest rates or struggling to make meaningful progress on your balances.
If you need help developing a plan, consider Credit & Budget Counseling through CCCS of Chattanooga. During a credit counseling session, a certified counselor reviews your income, expenses, and debts and makes recommendations based on your financial situation.
One recommendation may be a Debt Management Program.
A Debt Management Program is not a debt consolidation loan. Instead, CCCS of Chattanooga works with you and your participating creditors to create a repayment plan. Depending on your creditors, the program may offer benefits such as reduced interest rates. You make one monthly payment to CCCS, which then distributes the appropriate payments to your creditors.
Not sure whether a Debt Management Plan could help? CCCS of Chattanooga's My Virtual Counselor lets you explore how much you may be able to save through a Debt Management Plan before meeting with a counselor.
Bottom Line
You don't have to keep worrying about how you'll make progress on your debt. A realistic budget gives you a clearer understanding of where your money is going and a plan for directing more of it toward your financial goals.
If budgeting on your own isn't getting you where you need to be, CCCS of Chattanooga offers nonprofit credit counseling, debt management, financial education, and other resources to help you determine your next steps.