Anyone who has ever been in debt knows that it’s a stressful state of being. Worrying about money all the time, how you’re going to pay it back, and a timeline for repayment can be daunting. But you have options that can help you pay down your debt more efficiently - one of which is a good personal budget.
If you're looking for help building a budget and paying off credit card debt, here are tips to help you create a working budget and a debt payoff plan that can get you there.
Get a Full Picture of Your Finances
To get started, you’ll want to list all your income sources. Then, you’ll need to list all your debts, balances, and interest rate, as well as your minimum payment for each bill and their due dates. To get a good idea of how you’re spending each month, try using an app or manual tracking method to track your spending for 30 days.
You can also use CCCS of Rochester’s free financial calculators to better understand your debt, monthly payments, debt-to-income ratio, and potential payoff timeline.
Choose a Budgeting Method
There are a number of ways you can choose to budget based on expert recommendations. Here’s a few to consider:
- Zero-Based Budgeting: This method has you assign every single dollar that you make each month to a specific job, so when you subtract all your expenses, savings, and debt repayment from your income, you have zero left over.
- 50/30/20 Rule: The 50/30/20 rule provides direction on allocations. For instance, 50% would go toward your household expenses, like mortgage or rent, utilities, groceries, insurance, minimum debt repayment, and transportation. Then, you’d take 30% for wants, like dining out, entertainment, shopping, and subscriptions. Finally, 20% goes toward savings and debt repayment, including an emergency fund, retirement accounts, and making bigger payments beyond the minimum on your cards.
- Envelope Method: With this budgeting technique you would divide your money into real envelopes, one for each category, and only spend what’s in that envelope for the month. Once it’s empty, you stop spending until the next month.
Ultimately, you should choose the budgeting method that works best for your lifestyle and needs. You can also explore more information about creating a budget and managing your finances through CCCS of Rochester.
Cut Expenses Strategically
Once you know what you’re spending each month, you’ll want to decide what expenses you can cut down. Make a list of your needs versus your wants. Items like subscriptions can be a temporary sacrifice while you make lifestyle changes that allow you to repay your debt.
Pick a Debt Payoff Strategy
Next, choose a payoff strategy for your repayment.
- Debt Snowball: With this method, you pay off your smallest balance first while paying the minimum payment on your other debts. Once you pay the smallest balance off, you move onto the next smallest.
- Debt Avalanche: The debt avalanche is similar to the snowball, but instead of focusing on repaying your smallest balance first, you focus on the card with the highest interest rate, which ultimately saves you more money in the long run.
- Hybrid Approach: You can also mix and match both methods, depending on which debt you’d like to get paid down first.
Not sure how different payment amounts could affect your payoff timeline? CCCS of Rochester offers several debt and credit card calculators that can help you compare repayment scenarios.
Automate and Build in Accountability
Ways that can help you stay on track include automating minimum payments to avoid late feeds, checking in on your budget each month, and using a tracking app to help you keep on top of your expenses throughout the month.
When the Budget Isn't Enough: Debt Management Options
Sometimes budgeting and cutting expenses aren't enough to overcome high credit card balances and interest rates. If you're having difficulty keeping up, consider making an appointment for credit and budget counseling.
A certified credit counselor can review your income, expenses, and debts and recommend options based on your financial situation. One option may be a Debt Management Program.
With a Debt Management Program, CCCS of Rochester works with you and your creditors to establish a manageable repayment plan. Depending on your situation and creditors, a DMP may provide reduced interest rates and one monthly payment to CCCS, which then distributes payments to your creditors.
You can also use My Virtual Counselor to explore how much you may be able to save through a Debt Management Program before meeting with a counselor.
Bottom Line
Whatever method you decide on, remember that any step forward is progress toward greater financial health. Debt won't disappear overnight either, but consistency will get you there.
And if managing your debt on your own becomes difficult, you don't have to rely on guesswork. CCCS of Rochester offers nonprofit credit counseling, budgeting assistance, debt management options, and financial education to help you determine the next steps for your situation.