Best Budgets for Paying Off Debt

By Ashley Wirgau on April, 5 2021
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Ashley Wirgau

According to Experian, in 2020 the average American carried over $92,000 in debt including debt ranging from credit card balances to mortgages to auto and student loans. That’s a lot of ground to cover when trying to get a handle on things, so how does a frugal (or not-so-frugal) consumer go about making a dent in that mountain of debt?

Personal budgeting is a great way to decrease debt faster. Getting an itemized picture of your spending helps bring better accountability to purchasing decisions. Not all budgets are created equal, though, so play to your strengths and select a game plan that is sure to get you to your debt-elimination goals.

Pay Yourself First Finances

One of the easiest ways to budget is to simply pay yourself before paying anybody else (i.e. the landlord, the coffee shop, or the store with the fancy shoes). This savings-first approach is a simple way to make sure your savings and debt is accounted for every month before any other spending occurs. An easy yet disciplined approach like this one ensures a healthy savings account while helping to reduce debt.

The “savings first” concept is pretty basic. Individuals decide upon a set amount or percentage of their income each month and designate those funds to a savings account, an emergency stash, outstanding debt, or all three. There is a general agreement that 20 percent of each paycheck is a great place to start. Depending on your amount of debt, though, this percentage could be increased or manipulated to make larger strides. For those really set on eliminating money wasted on interest, this is a sure-fire way of tackling debt quickly and consistently, especially if you challenge yourself to push that number past 20 percent.

The 50/30/20 Plan    

This method of budgeting encourages users to allocate their funds into three distinct yet generalized areas. Fifty percent of incoming funds are designated for “needs,” another 30 percent goes toward everyday “wants,” and the final 20 percent is used to pay down debt and increase savings. This plan allows for leniency and can be easier to track than some of the more-involved budgeting structures. It can also come in handy for consumers who have a hard time saying, “no” to their whims.

Like with any budgeting change, it is important to first determine where your money is currently being spent. How close are you to these percentages already? Will this be an easy transition or might you struggle a bit? If you find that your numbers are pretty far from the 50/30/20 split, ease yourself in by starting with familiar amounts and shave from there. For example, if your spending on “wants” currently outweighs your spending on “needs,” use the first month to equalize these percentages, then decrease the “wants” section by 2-3% until they reach the goal. To visualize what this might actually look like for your life, check out NerdWallet’s budgeting calculator.

Zero-Based Budgeting

If you love to have all the information, zero-based budgeting might be your path to financial freedom. This method of money tracking is designed to account for every dollar, so micro-managers tend to fare well with this budgeting style. The overall premise is based on the idea that every dollar earned has a job and is assigned a specific area to be utilized.

To get started, consumers should sit down and calculate their monthly income. Next, look through the past three or four months of bills, bank statements and utility expenses to gain a better understanding of where the money is currently going. What trends do you notice? What are you doing well and what could you be doing better?

After collecting all the data, it’s time to make a plan. Of course, this can be done with good old pen and paper, or you might employ a high-tech way of designating money to its proper home using the Goodbudget, EveryDollar or YNAB apps. These digital aides help users keep tails on every cent and can really make an impact on debt elimination when focused efforts are made.

Envelope Approach

This may be the oldest trick in the book. This cash-based approach has spenders take pre-determined amounts of money from their paycheck each week (or month) and divide the funds into physical envelopes. Each envelope is labeled with where the contents can be spent (i.e. groceries, gas, clothes, car payment, mortgage). Then, when the money runs out, that’s it; the spending in that given category is finished until the next week or month when the cash is replenished.

In today’s swipe-to-spend world, this method may seem outdated, but it actually works. It has been proven that consumers are more conscious of their spending when using cash versus credit, so for people really intent on driving down debt, this could be a great option to explore. For those opposed to handling actual money, there are apps that function in similar fashions, utilizing virtual envelopes to control spending. Paid subscription options like Mvelopes is one app, while Android users have options like SimpleBudget to download for free.

There are actually several user-friendly apps devoted to helping direct dollars where they need to go, so even the most “hands-off” budgeter can get a grip on their spending habits. All it really takes is a little focus (and maybe a smartphone) to start charging down the path to debt elimination.