Budgeting to Pay Off Debt: Ultimate Guide

Q: How do you create a budget and pay off debt?

To create a budget and pay off debt, track your income and expenses to identify spending patterns. Prioritize essential costs and allocate extra funds toward debt repayment. Use strategies like the snowball (smallest debt first) or avalanche (highest interest first) methods. Consistency and discipline are key to success.

Q: What is the fastest way to budget to get out of debt?

The fastest way to budget with the aim of paying off debt is to stay consistent. The more you cut from your budget at an even pace, the more extra payments you can put toward those balances.

Q: What debt should you pay off first?

There are two schools of thought on this question. The first is to pay off the smallest balance to gain momentum, and the second is to pay off the balance with the highest interest rate in order to save the most money. Choose the strategy that best fits your financial situation and helps you stay committed to becoming debt-free.

Budgeting to Pay Off Debt: Ultimate Guide

Lauren WardUpdated January 18, 2025

Share this article:

Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

There's no shortage of debt in America. Total household debt reached $17.94 trillion in Q3 2024. But no matter how large or small your personal debt balance may be, budgeting to pay off debt of any kind can set you up for a stronger financial future.Keep reading to learn how to budget to pay off debt as well as soak up some smart tips for lowering your balances. Whether you have maxed-out credit cards, a high-interest auto loan, student loans, or any other type of outstanding debt, you'll be ready to tackle them all.

Using a Budget to Pay Off Debts

Lowering your debt is an admirable goal. But in order to achieve it, you need a plan. And the best type of planning to pay off debt is creating a budget and sticking to it.What exactly is a budget? It's a way to track your income and expenses, so you know exactly what you're spending and where.By understanding these numbers, you can make decisions about what areas to scale back in spending in order to put your money toward other things — like paying off your debt.

Creating a Budget to Pay off Debt

If you’re wondering how to pay off debt, here are seven strategies that will make a big difference.

1. Determine Your Monthly Take-Home Pay

In order to budget to pay off debt, you need a clear understanding of how much money you actually have to work with. If you have a job, take a look at your paystub (and your partner's, if you share finances) to see your take-home pay. Take-home pay isn't your salary divided by 12 months. It's actually less than that; it's the amount of money going into your bank account after deductions like taxes, health insurance premiums, and 401(k) contributions.

2. Record Your Monthly Fixed Expenses

Next, calculate all of your current fixed expenses each month — these are the costs that don't vary:

Rent or mortgage
Car payment
Cell phone bill
Streaming services
Child care

After identifying your fixed expenses, record the payment amounts and due dates to ensure timely payments and avoid late fees. Set up automatic payments where possible to streamline the process. Revisit your list periodically to account for changes, such as a rent increase or new subscription, and update your records accordingly.

3. Identify Recent Spending in Other Areas

Your next task is to pull out your recent bank and credit card statements to find out how much you're spending on non-fixed expenses. These things still might be necessary (like gas and groceries), but you have control over how much you actually spend. It might be uncomfortable to categorize every single transaction from the last month, but it's an important step in creating a budget for paying off debt. Some ideas for categories: food, shopping, health/wellness, travel, and gas.

4. Choose Areas to Scale Back Spending

With all of your spending habits identified, it's time to identify where you can scale back. Perhaps you can cancel some streaming subscriptions or pick a cheaper cell phone plan. There's almost always room to remove something from your budget, which gives you more cash to put toward extra debt payments. Recommended: 25 Ways to Save Money Fast

5. Set Spending Limits on Non-Fixed Essentials

You can scale back on both essentials and non-essentials, or a combination of both. Set monthly spending limits in each area so you can still enjoy the things you love, but with an awareness of the cost. For instance, give yourself a weekly grocery budget instead of browsing through the aisles without a set plan.Another strategy is to create a spending alert on your banking app that notifies you when you're close to a certain dollar amount at a certain retailer or category, like Amazon or restaurants.

6. Designate a Regular Sum for Paying Off Debt

Once you have a sense of your current spending and areas where you can scale back, it's time to create a debt pay-off plan. Choose how much extra money you want to put toward your debt balances each month. You can start off small as you create new spending habits, or make an aggressive plan if you're ready for change. The idea is to find a balance that lasts over time, rather than fizzling out after a few short weeks.

7. Automate Your Extra Payments

If you know how much extra you can reasonably pay on your debt, automate those extra payments to correspond with your paycheck. That way you've already made the additional payment before you start spending in other areas, like eating out or shopping. Recommended: How to Maximize Savings

Benefits of Using a Budget

Using a budget is an essential part of reaching any financing goal, whether it's paying off debt early or saving up for a large purchase. It also helps you prepare for the future by creating savings opportunities for emergencies and retirement. That can lead to great confidence that you can weather life's ups and downs.

How Can Savings Help Pay Off Debt?

If you have outstanding debt as well as some money in a savings account, you may wonder if you should simply use that cash to put a dent in your balances. In reality, it's smart to have certain savings goals funded before using any leftover funds for your debt. For instance, most financial experts recommend having anywhere from three to nine months' worth of expenses tucked away in case you lose your job. Additionally, you should do your best to regularly contribute to your retirement fund so that you can ideally benefit from long-term growth.

5 Other Ways to Pay Off Debts

1. Debt Consolidation

Consolidating your debt refers to taking multiple outstanding balances (usually credit cards) and paying them off with a single debt consolidation loan. This allows you to have just one monthly payment to worry about. And in an ideal scenario, you could qualify for a lower interest rate that saves you money.

2. Balance Transfer for Credit Cards

Another option for credit card debt is to do a balance transfer. That entails opening a balance transfer credit card and rolling other balances onto that new account. Oftentimes, there is a fee associated with this strategy, usually charged as a percentage of your debt and added to your balance.On the plus side, some balance transfer credit cards offer a low or even 0% introductory APR, so you essentially put a pause on making interest payments as long as you make at least the minimum payment on time each month.

3. Refinance Loans

You can also apply to refinance a loan in order to secure a lower interest rate. You can also adjust the term to stretch out monthly payments over a longer period of time; while that might lower how much you pay each month, just remember that it usually means you pay more in interest over time. Student loans, mortgages, auto loans, and personal loans can all be refinanced to adjust your loan terms. Just watch for costs like origination fees that can diminish the benefits of refinancing. Recommended: Refinancing Personal Loans: How & When to Do It

4. Pay Off the Smallest Balance

There are two successful ways to stay motivated while paying down debt. The first is to identify your smallest balance and throw all your extra payments at that one (while still making minimum payments on your other balances). Experiencing that first success could deliver the inspiration you need to keep going.

5. Pay Off the Highest Interest Rate

Another common debt payoff strategy is to pay off the highest interest rate first. After all, that's the bill that's accumulating the most interest. Choosing this bill as your target for extra payments can save you the most money over time.

The Takeaway

Creating a budget for paying off debt is a move impossible to regret. You'll feel more in control of your finances, and once those balances are gone, you'll have cash flow ready to boost your other savings goals. If you’re interested in a savings account, Lantern by SoFi can help. With our online banking marketplace, it’s easy to compare high-yield savings accounts based on APY, fees, and balance minimums.Lantern can help you compare online savings accounts and find today’s best rate.

Frequently Asked Questions

How do you create a budget and pay off debt?

What is the fastest way to budget to get out of debt?

What debt should you pay off first?

Photo credit: iStock/Rmcarvalho

LNTBNK-Q424-013

About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

Share this article: