How to budget to pay off debt

If paying off debt is one of your goals, it helps to have a budgeting plan in place as you work toward lowering your balances. A debt payoff budget can also give you the insight you need to plan for future financial goals and adjust them as you encounter lifestyle and circumstance changes.

Start by thinking of your budget as a financial game plan. You can use the income and expense information in your budget to develop strategies to make debt payments on time, reduce the interest you pay and improve your credit report over the long term.

Budget to pay off debt: A step-by-step guide

To achieve a goal of reducing your debt, you'll first need to understand how much money you take in as income each month and how much goes out again when you pay bills, add to savings accounts or make everyday purchases.

Increasing your debt payments may require a shift in your game plan as you implement new strategies to pay off credit card balances in full or increase the amount of principal you pay on student loans. By following the steps below, you'll create a budget that prioritizes debt payments.

1. Itemize and prioritize expenses

The budgeting process begins with calculating after-tax income. This includes all sources of income, from your primary job to overtime or freelance work, as well as interest earned on investments.

Once you know how much you have to spend, the next step is estimating your monthly expenses:

• Make a list of all of your bills, loan payments and other typical monthly expenses.
• Review the list and rank each item according to its importance to you.
• Rank essential living expenses, such as housing and utilities, above discretionary spending, like entertainment and vacation travel.

2. Identify areas to cut spending

To pay off debt faster, you'll need to carve out a larger portion of your expense budget for loan and credit card payments — this often means finding a way to lower your non-essential spending. Depending on the amount of debt you have outstanding, you can cut or reduce expenses like restaurant meals, subscriptions or tickets to sporting events.

Another option is to implement more cost-effective strategies for discretionary items, like buying frequently used items in bulk at a discount or waiting for sales on furniture or clothing.

You may also want to look for ways to save money on essential expenses, such as lowering your commuting cost by carpooling, taking public transportation or splitting the costs of ride share services.

3. Factor in leftover funds

After making adjustments to your anticipated spending, run the adjusted expenses through your budget and recalculate how much money you'll have left at the end of the month. If possible, strive to allocate 5–10% of the leftover funds toward paying down your debt.

You'll also want to save some of the excess funds in your budget. Review your savings goals and put extra money in a retirement account or build an emergency fund.

4. Decide which debts to pay off first

The type of debt you choose to pay off can affect your credit score and long-term finances. To determine where you should start, it helps to ask yourself questions as you look at your unique financial goals:

• Do you want to settle your student debt? If you're only covering the interest portion of your student loan debt, add a principal payment to help you pay it off faster.
• Do you want to lower your interest costs? Paying more than the minimum on high-interest-rate credit cards will reduce the total interest you pay on the balance.

If you're looking to simplify your monthly payments, consider paying off the smallest debt balance first and then moving to the next smallest once the first is paid off — continuing until all your debt is gone. Also known as the snowball method, this enables you to celebrate small wins as you pay off balances one by one.

You can also try the avalanche method, where you pay off your highest interest rate debt first, then progressively move to the debt with the next lower interest rate. This can ultimately save you more in interest than the snowball method.

5. Stay organized

Unexpected expenses occasionally arise, which can stretch your budget and prompt you to rethink your spending. In these instances, it's crucial to stay on top of your expenses. If you need to pivot and deal with an emergency car repair or an HVAC breakdown, don't forget to add the one-time cost into your budget.

Double-check your account by monitoring bank balances frequently in a mobile banking app* to ensure you haven't missed any bills. If you're not able to meet your extra debt payment goals for the month, you may decide to make additional adjustments to your spending.

Tools to help simplify debt management

Budgeting apps and other digital tools not only help you track spending, but they also provide insight and analysis into your finances and credit utilization. With easy-to-read charts and graphics, advanced budgeting platforms provide visuals that give you a quick summary of your financial data, which can help you avoid getting lost in the numbers.

• Online banking platforms: You can receive direct deposits and pay bills with one click. Additionally, you can schedule automatic payments to ensure that debts are paid early in the month, before you're tempted to spend your paycheck on lower-priority items.
• Mobile banking apps: Check your account balances in real time. Combined with payment tracking on the go, banking apps help you stay in touch with your finances and plan ahead for large expenditures. Expense tracking is available through budget-focused apps that enable you to capture and file receipts quickly.
• Online calculators: Ensure that you're not leaving anything out of the equation with a budget calculator that provides a clear picture of how much money you can spend or save. For debt payments, a credit card payoff calculator shows how long it will take to pay off your purchases when you only make minimum payments — and how much interest you can save by paying just a little more each month.

Once you've lowered your debt to a comfortable level, don't forget to think about increasing your savings.

Get started with better budgeting

If you're currently living with debt and looking for ways to get the most out of your budget, consider opening a Citizens checking account and setting up automatic payments for your loans.

With Citizens, you'll also gain access to a wealth of financial tools, including online banking, the Citizens mobile banking app* for expense tracking and a loan calculator to help you optimize your payments and achieve your financial goals.