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How To Build a Budget Helpful For Debt Repayment

Jul 20, 2023

Are you looking for ways to create a budget that supports your debt repayment journey? 

Then, look no further! 

Finding a way to keep track of your budget and to help you get out of debt can be easy and simple.  

Woman sitting at a table looking at receipts calculating her expenses
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Creating and understanding your budget can be a very important step in your debt-free journey. 

This article is a step-by-step guide to help you understand budgeting simply and easily.  

The focus here is to help you break down each area of your budget and help you get organized, stay on track, and get your debts paid off. 

There are tons of apps available that can help you keep track of your budget but don’t worry a simple pen and paper or a spreadsheet can do the same tasks we are about to teach you.

So, get ready to learn to simplify your budget!

Track and Assess Your Expenses

Let’s talk about the main factors to help you set up a budget that supports your debt repayment plan. 

Tracking and assessing your expenses will give you a clear view of where you are and where you are headed with your finances.

The first step in setting your budget is to take a look at your bank statements and receipts for the past few months.  This will give you a better understanding of your spending habits.

You will need to look over every single income and expense you have on the statements and write them down in separate categories.  

Step 1:  List Your Income

Income is any money that was deposited into your bank account – that means your normal paycheck, side hustle, garage sale, freelance work, or any money that you’ve made during the month.

Start by looking at your bank statements for every deposit you have made and then start creating a separate income budget line for every source of income.  Here’s an example:

  • Your Normal Paycheck – $2,300
  • Side Hustle – $650
  • Marketplace Sale – $120
  • Total income: – $3,070

If you’ve had an irregular income, take a look at what you’ve made in the last few months and list the lowest amount to start planning your income budget line.  You can always make adjustments later in the month if you make more money.

Step 2:  List Your Expenses

Now that you have figured out your income, it’s time to take a look at your expenses.  Start by looking over your bank statements and receipts reviewing all of your expenses and categorizing them. 

How to Track your expenses for debt repayment

The most important categories should be your “four walls” which are your fixed expenses – housing, food, utilities, and transportation – in this exact order. Here is an example:

Budget Category – Housing

  • Mortgage / Rent
  • HoA Fees

Budget Category – Food

  • Groceries

Budget Category – Utilities

  • Electricity
  • Water
  • Gas
  • Sewer
  • Garbage

Budget Category – Transportation

  • Gasoline
  • Car Insurance
  • Oil Change (maintenance)

The importance of categorizing your four wall expenses first is to make sure that your major necessities are covered before your discretionary spending (debt payment, dining out, entertainment, etc.).  This will also give you a better understanding of where your money is being spent.

Prioritize Debt Repayment in Your Budget

You will need to commit to repaying your debt by prioritizing debt repayment in your budget. This is a crucial step to help you make progress in repaying your debt.

Here are important steps you can take to help you:

1. Identify Your Debt Repayment Goals:

Determine your debt repayment goals, whether it’s paying off specific debts or becoming debt-free altogether.

Having clear goals will give you a sense of purpose and direction in your budgeting efforts.

2. Allocate a Fixed Percentage of Income:

Designate a fixed percentage of your monthly income towards debt repayment.

This ensures that debt repayment becomes a non-negotiable part of your budget and takes precedence over other discretionary expenses.

3. Cut Unnecessary Expenses:

Review your budget and identify expenses that can be reduced or eliminated.

Look for non-essential spending, such as dining out, entertainment, or impulse purchases, and redirect that money towards debt repayment.

4. Implement the 50/30/20 Rule:

Allocate 50% of your income to needs (e.g., housing, food, utilities, transportation), 30% to wants (discretionary spending), and at least 20% to debt repayment and savings.

Adjust the percentages as necessary to align with your debt repayment goals.

50 / 30/ 20 BUDGET RULE Graphic Chart

5. Use Windfalls Wisely:

Whenever you receive unexpected money, such as a raise,  tax refund, bonus, or gift, consider using a significant portion of it to make a lump-sum debt payment.

Windfalls can provide an excellent opportunity to reduce debt significantly.

6. Snowball Your Debts:

Apply small, extra amounts of money you find in your budget towards your debts.

These small “snowball” payments can add up over time and accelerate debt repayment.

7. Reevaluate Your Budget Regularly:

As your financial situation changes, reevaluate your budget and adjust your debt repayment allocations accordingly.

If you receive a raise or promotion, consider increasing your debt repayment percentage to help you pay off your debt faster.

8. Avoid Taking on New Debt:

While repaying your current debts, commit to avoid taking on new debts, especially high-interest ones like credit card debt.

Prioritize living within your means and resist the temptation of unnecessary borrowing.

9. Create a Debt Repayment Calendar:

Set up a debt repayment calendar with target dates for paying off each debt.

Having a clear timeline can help you stay focused and motivated on reaching each debt-free milestone.

10. Celebrate Progress:

Celebrate each debt paid off and progress made on your journey. Rewarding yourself (within reason) can be a powerful motivator to continue your debt repayment efforts. 

If you want to learn more about how you can stay motivated while paying off your debt, check out the article Stay Motivated To Get Out of Debt.

11. Automate Debt Payments:

Whenever you can, set up automatic debit payments to ensure you never miss a due date. This also prevents the temptation of using that money for other expenses.

12. Avoid Lifestyle Inflation:

As your income increases, resist the urge to increase your spending proportionally. Instead, use the extra income to accelerate debt repayment and increase savings.

13. Consider Debt Consolidation or Refinancing:

Explore options for consolidating high-interest debts or refinancing loans to obtain better interest rates.

This sometimes can help you save on interest and streamline your debt repayment efforts.

Keep in mind that this should be your last option to avoid adding any more debt as consolidating and refinancing can come with extra fees attached.

14. Stay Disciplined:

Debt repayment requires discipline and consistency.

Stay focused and committed to your budgeting and debt repayment plan even when faced with challenges or setbacks.

15. Seek Support and Accountability:

Share your debt repayment journey with friends, family, or online communities.

Having support and accountability partners can encourage and keep you on track.

Check out Stay Motivated To Get Out of Debt for some awesome podcasts and books to help you stay motivated when you are on your debt-free journey.

Adopt a Cash-Based Envelope System

There are many proven systems you can use to help with your budget and debt repayment plan.  

The cash-based envelope system is one of the most effective budgeting systems because it promotes mindful spending, curbing impulsive purchases, and helps you stick to your budget and not overspend on non-essentials. 

Cash envelope system info graphic

This method can be particularly useful for those who struggle with overspending or find it challenging to track expenses digitally. 

When you adopt the cash-based envelope system for certain categories, you have more control over your finances and work towards your financial goals with greater intentionality and success.

Some great categories to budget for using the cash-based enveloped system are Groceries, dining out, and entertainment.

Check out How to Create a Cash-Based Envelope System for Your Budget to learn more about how you can include it in your budget.

Automate Your Savings

When you are on a debt repayment journey, saving money does not have to be hard or complicated. 

Along with budgeting for your debt repayment, also consider automating your savings.  You can create a category line on your budget and set a percentage (or a set amount) each month so you don’t have to worry about it every time you think about putting money into your savings.  

5 Ways to save Money Infographic

Automating your savings is a proven way to create a consistent and reliable savings habit.  By making savings automatic, you’ll start to build wealth more effortlessly and reach your financial goals faster.

Check out the 10 benefits of automating your savings to help you build wealth.

Remember, that the key is to start small while you are paying off debt, stay consistent, and make adjustments as your financial situation evolves.

Consider the Latté Factor

Small daily expenses can add up significantly over time.  Knowing when to make certain purchases throughout the year can help you save a lot of money.

Start by evaluating your small daily expenses, like your daily coffee or snacks, and determine if cutting back on these costs could lead to significant savings over time.

The Latté Factor book by David Bach

By cutting these minor daily/weekly expenses, you can apply those savings toward your financial goals to help you achieve greater financial stability and build wealth.

Set Realistic Goals

Let’s be honest, you can only succeed if you are honest with yourself.

Setting realistic goals will only help you achieve your debt repayment faster.

It’s important to create a budget that aligns with your financial reality and lifestyle.  Setting an overly restrictive budget can lead to frustration and make it harder to stick to your plan.

So, make sure that when you’re setting up your budget you create some flexibility and allow room for occasional splurges for treats to maintain your motivation.

Your goal should be to create a realistic roadmap to improve your financial success.  With patience, dedication, and thoughtful planning, you can steadily work towards financial security and the life you dream of.

Review and Adjust Regularly

One of the most important things to remember is to make sure you review and adjust your budget regularly.

This will allow you to stay in control of your financial future. It also ensures that your goals remain achievable, even when your circumstances change.

Just remember, life happens for everyone and sometimes things need to be changed to keep you motivated and help you stay on track.

Making the necessary adjustments to your budget will be beneficial to you in the long run.

As you learn to budget, making progress is the most important part of the journey – so adjust your budget whenever you need to.

Final Thoughts

With all this information, just remind yourself that your budget is unique to you!

By incorporating these proven tips into your budgeting strategy, you can build a budget that not only supports your debt repayment journey but also enhances overall financial well-being and helps you build wealth.

The important key here is to find a budgeting approach that will work for your specific needs and help you stay on track with your financial goals.

Don’t forget to celebrate your milestones, you deserve it!

The Budget Academy
Fab Kellum author of the Girl, Get Out of Debt! blog

Hey you! Welcome to The Budget Academy. I am Fab, a mom, and an entrepreneur at heart. Like many, I have overcome financial struggles, and now I get to share with you how I became debt-free and what I learned on my own personal journey.  I have a Finance and Real Estate background and am passionate about helping others succeed and achieve financial freedom.  So, please don’t be shy, let’s connect and start this journey together! Learn more about me here.