Want to Pay Off Your Debt? Try Building a Better Budget!
If you try and pay down your debt without a strict budget, you'll have a really hard time coming up with the extra money—even if you're working a second job.
For many people, the best way they can make their money go further is by paying down the pile of high-interest consumer debt that’s weighing down their everyday life. What better way to improve your financial outlook than by freeing up all that money that’s going towards monthly minimums?!
Well, if you’re looking to pay down excess debt, then one of the best things you can do is build better budget—or build a budget in the first place. Even if you’re working one or two extra jobs to bring in extra funds, you’re going to need a budget to make sure all that newfound cash doesn’t splurge itself out of existence.
For all those aspiring budgeteers out there looking to pound their debt into oblivion, here are some helpful steps you can take.
“We’re all motivated by the ‘What Ifs?’ Of life. Asking yourself what you would do if you didn’t have debt might be the impetus you need to jump in feet first,” said personal finance blogger and Queen of Free Cherie Lowe.
“Rather than paying off debt for the purposes of paying off debt in itself, build a focused dream of what you’ll do once you’re on the other side of debt. Will you travel? Buy a new home? Go back to school?”
“Knowing why you’re doing what you’re doing will keep you refreshed and strong on days that are long,” she said.
Use a no-spend month to jumpstart your saving.
Saving money to pay down debt is sometimes a game of momentum. It’s difficult to at first, but once you get going, everything starts to click. That’s why Carla Dearing, CEO of online financial wellness service Sum180, recommended starting things off with a “no-spend” month to really get you in the groove.
“It’s simple,” said Dearing. “Commit to a 30-day period of spending ONLY on necessities. Walk or bike to everywhere instead of driving; take lunch to work every day; embrace free entertainment options, like exploring local parks.
“Not only will you save a lot of money during this one month period, you may find yourself re-evaluating old spending habits altogether and deciding you prefer your own creative, low-cost alternatives.”
Figure out your expenses.
The first step to building a budget is getting a handle on your expenses and on how much you’re spending every month. Once you know that, you’ll have a very clear idea for where you can cut back.
“Many of us have no idea what our expenses add up to every month,” said Dearing. “When you know where your money goes, you are in control and can be thoughtful about aligning spending with priorities.”
She suggested that you create your first-time budget use an online money tracking service, like Mint or Quicken, as they’ll help you more easily get all of your financial information in one place. You can find more budgeting apps in our Budget App Article, and any first-time budgeters out there should also check out our Beginner’s Guide to Budgeting.
Review your subscriptions and auto-payments.
Cutting down expenses is going to mean cutting out lots of extraneous things like ordering takeout three nights a week. But a good place for you to start cutting is with your hidden expenses, the kind of stuff that leaves your bank account every month without you even thinking about it.
“Look at your recurring or automatically enrolled payments and see if you can cut any streaming services, gym memberships, or delivery plans.” offered Bryce Lloyd, Phoenix Market President for FirstBank.
According to Dearing, there might even be subscriptions you’re paying for every month that you’ve completely forgotten about!
“For example,” she said, “if you haven’t done a serious credit card review in a while, you may be surprised to see how many charges are automatically showing up on your credit card every month and every year. They’re not necessarily fraudulent; they may be charges you legitimately signed up for long ago, and then never thought about again.
“You may not notice right away,” she added, “but automatic charges like these all add up, especially over time. The expenses may be fine if you truly need and can afford them, but often it’s a case of out of sight, out of mind.”
Canceling all these subscriptions one-by-one could be a bit time intensive, but it’ll definitely be worth the time and effort. As Dearing points out, there are also services like Trim and Truebill that will help you monitor your subscriptions and cancel them when you want out.
Gameify the experience.
Budgeting and paying down debt aren’t fun. But that doesn’t mean you can’t add some little celebrations to make the process more enjoyable! And rather than only celebrating big accomplishments, Lowe recommends that you add in a larger number of smaller celebrations all along the way.
“You have to have a system of rewards in place in order to help you be successful,” she said.” That means rather than focusing on a goal of paying off debt in its entirety, break down the enormous process into smaller goals. And when you hit those micro-goals, celebrate.”
“The initial goals should be minor—go a day or two without eating at a restaurant. The more success you have, the more the process becomes pleasant and even fun.”
Cut out two or three regular expenses.
Speaking of takeout, Dearing recommends that you try identifying two or three monthly expenses that you can do without … and then doing without them!
“For one person, the eliminated expense may be premium cable and a too-generous data plan,” she said. “For another, it may be online shopping and extra spending on eating out.”
“Be creative so you don’t feel deprived,” she added. “If you love to eat out, challenge yourself to make delicious meals at home six nights a week. Your one restaurant meal per week will feel more special and you’ll save a ton of money.
Budget every dollar.
Lowe recommends going above and beyond in your budgeting and creating a “zero-based” budget. Simply put, this means you budget every last penny that you bring in. That way, you’ll avoid frittering away extra cash.
“Aim to budget every single dollar— whether you’re paying off debts, handling expenses, or saving money for a specific purchase—in your checking account each month,” she said.
“If you leave any extra cash no matter how small, you’ll spend it. If you move it out as quickly as possible, you’ll have greater success.”
Prioritize your high-interest credit cards.
Once you’re rolling with your new budget and you’re building up extra funds to pay off debt, you can turn your attention to strategy; Namely, what’s the best way to pay off your debt?
While there are always going to be caveats, you can’t really go wrong by starting with your credit cards—especially the ones that carry the highest interest rates.
“Whenever possible, pay more than your monthly minimum balance, focusing first on the cards with the highest interest rates,” said Lloyd. “There are interest rate calculators available on multiple sites that help you calculate payments to keep you on track to becoming debt free.”
“Once your payments are back on track,” he continued, “resist adding to that balance going forward. Some cards also offer balance transfers at lower interest rates, but be wary of fees.”
Paying off debt through balance transfers can have its dangers beside fees—namely, all that extra space you created on your old card can be overly tempting. Plus, closing the old card might have a negative impact on your credit score. Until you build up a solid practice of financial discipline, you should probably steer clear of them.
Dearing recommends that you use as much as 50 percent of your monthly savings to pay down your credit cards. Plus, she has a tip to help you save more in interest:
“Contact your credit card company and ask if they will lower your annual percentage rate (APR) on the card. Many credit card issuers would rather lower your rate than have you transfer to another company. It’s worth asking.”
Make the most of financial windfalls.
Lastly, you should utilize any financial windfalls you have coming your way: stuff like your tax refund or a month where you get three biweekly paychecks. Whatever it is, use that money wisely—even if it’s to take care of your other financial priorities!
“Add them to your cash reserves to top off your emergency fund,” suggested Dearing. “Unexpected expenses happen all the time, but if you have the right cushion of savings, these unexpected expenses don’t have to derail you.”
Paying off debt should be a top financial priority, but you shouldn’t let it blind you to the importance of maintaining a well-stocked emergency fund. Lacking funds in a financial emergency will leave you with your choice of only different levels of bad options.
Carla Dearing is CEO of Sum180 (@mysum180), an online financial wellness service designed to be simple and affordable. She is also CEO and Managing Director of IMC, a marketing services agency. Previously, Carla held senior executive positions with at the University of Louisville, Community Foundations of America and Investors Capital Services. Earlier, she worked at Morgan Stanley and American National Bank & Trust Company. She holds an MBA from The University of Chicago Booth School of Business and a BA from the University of Michigan, Phi Beta Kappa.
Bryce Lloyd is the Phoenix Market President for FirstBank (@efirstbank). FirstBank has over $18 billion in assets and over 100 locations in Colorado, Arizona, and California. Since 2000, FirstBank has contributed over $55 million and countless hours to charitable organizations. Mr. Lloyd has been with FirstBank for the entire 29 years of his banking career. He has served on numerous non-profit boards, including the Boys and Girls Clubs of Greater Scottsdale and the Scottsdale Area Chamber of Commerce.
Cherie Lowe (@Thequeenoffree) is a personal finance blogger at Queen of Free and author of the book Slaying the Debt Dragon, her story of paying off over $127K in debt. She loves nothing more than helping people find freedom in their finances, save money, and live life to its fullest. Her and her husband Brian are finishing the final round of edits on our their book: Your Money, Your Marriage: The Secrets to Smart Finance, Spicy Romance, and their Intimate Connection due out September 2018 from Zondervan (Harper Collins Christian).
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