Creating a budget may seem overwhelming or boring, but if you do it efficiently, it can help you to pay down multiple debts strategically, save money on interest, and reach financial freedom sooner.
Follow the tips below to create a budget that works for you:
Tally Up Your Financial Life
Budgeting starts with knowing exactly what you owe each month and how much you have to work with. Make a comprehensive list of all your debts and expenses, including their interest rates and minimum monthly payments. This gives you a complete picture of your finances in one place.
Create a Budget
Your budget doesn’t need to be fancy. The basics work just fine. Track your monthly spending, income, and know the difference between the necessities—like your mortgage/rent, groceries, and utilities—and discretionary spending on entertainment and recreation.
Choose Your Debt Repayment Strategy
Putting a debt repayment strategy in place not only helps with planning, it also gives you purpose and parameters. Two methods stand out for repayment: the debt avalanche and the debt snowball.
- Debt Avalanche: In this method, you pay down your loan with the highest interest rate first by putting extra money toward that loan while paying the minimum payments on your other loans. Once that’s paid off, move on to the next highest—and so on. This method will typically help you save the most money in the long run.
- Debt Snowball: This method is often a great motivator because the wins can be quicker. To pay down your debt with the debt snowball, you would put extra money toward the loan with the smallest balance first while paying the minimum on your other loans. Just like the avalanche, once that card is paid off, it's onto the next card with the lowest balance.
Look for Side Hustles
Whether you get a second job, find (or make) items you can sell, or bring in a little extra money on the side can help you pay down your debt faster.
Automate Your Debt Payments
While you’re focused on paying more money toward one loan, make sure to set minimum autopayments on your other loans so you don’t miss a payment date.
Consider a Debt Management Program
A debt management program is typically set up through a nonprofit credit counselor, who negotiates directly with your lenders to lower your interest rates (sometimes to as little as 6%) and consolidates all your payments into one simple, affordable monthly payment. This can make repayment far less stressful and help you get out of debt faster, without taking out a new loan.