Creating a Budget to Prioritize Debt Repayment

If you’re new to personal finance and looking to get a handle on your debt, creating a budget is one of the most important steps you can take. Don’t worry if the word “budget” sounds scary or boring – it’s simply a tool to help you understand where your money is going and make a plan to reach your financial goals, like paying off debt and achieving financial freedom.

Why Creating a Budget Is Important

When you’re trying to pay off debt, it’s essential to know exactly how much money you have coming in and going out each month. That’s where a budget comes in! A budget helps you:

  1. Track your income and expenses
  2. Identify areas where you might be overspending
  3. Find extra money to put towards your debt repayment
  4. Stay on track and motivated as you work towards your financial goals

Think of your budget as a roadmap to financial freedom – it shows you where you are now and helps you navigate to where you want to be.

How to Create a Simple Budget

Creating a budget doesn’t have to be complicated. Here’s a simple step-by-step process to get you started:

Step 1: List your monthly income Write down all the money you bring in each month, including your salary, any side hustle income, and other sources like child support or rental income.

Example:

  • Salary: $3,000
  • Side hustle: $500
  • Total monthly income: $3,500

Step 2: List your monthly expenses Write down all your monthly expenses, including rent/mortgage, utilities, groceries, transportation, insurance, and any debt payments (like credit card bills or student loans).

Example:

  • Rent: $1,200
  • Utilities: $150
  • Groceries: $400
  • Transportation: $200
  • Insurance: $200
  • Credit card minimum payment: $100
  • Student loan payment: $250
  • Total monthly expenses: $2,500

Step 3: Subtract your expenses from your income This will show you how much money you have left over each month, which you can use to prioritize debt repayment.

Example:

  • Total monthly income: $3,500
  • Total monthly expenses: $2,500
  • Money left over: $1,000

Step 4: Make a plan for your extra money Decide how much of your leftover money you want to put towards debt repayment each month. You can choose to pay off your debts with the highest interest rates first (known as the debt avalanche method) or focus on paying off your smallest debts first for quick wins (known as the debt snowball method).

Example:

  • Money left over: $1,000
  • Extra debt repayment: $800
  • Remaining money for savings or other goals: $200

Congratulations, you’ve created a simple budget that prioritizes debt repayment!

Tips for Sticking to Your Budget

Creating a budget is just the first step – the real challenge is sticking to it! Here are some tips to help you stay on track:

  1. Use budgeting tools: There are many free budgeting apps and websites that can help you track your spending and stay on top of your budget. Some popular options include Mint, YNAB (You Need A Budget), and PocketGuard.
  2. Review your budget regularly: Check in with your budget at least once a month to make sure you’re staying on track and make any necessary adjustments.
  3. Find ways to cut expenses: Look for areas where you can reduce your spending, like eating out less often, cutting subscription services, or finding cheaper alternatives for regular purchases.
  4. Celebrate your progress: As you pay off your debts, take a moment to celebrate your wins! Recognizing your progress can help you stay motivated and committed to your budge