Best Budgeting Tips to Get Out of Debt

According to the Federal Reserve Bank of New York, American households had a staggering $17.5 trillion in debt during the fourth quarter of 2023.

While that number is certainly astronomical, it can also be comforting to find out that your struggle with debt is shared by millions of other people around the country.

Unfortunately, people often feel so overwhelmed by their debt that they feel like there’s no way out.

Money problems are one of the leading sources of stress for people around the globe. When you’re drowning in debt, it may be tempting to take drastic measures like filing bankruptcy, but that’s not always the best route.

It can have far-reaching consequences on your credit score, making it even harder for you to get back on your feet.

You’ve probably also seen commercials for companies that offer debt consolidation and other services.

While there are some companies out there that offer quality services, there are unfortunately others who prey on innocent victims who want to better their financial status.

There are plenty of reasons for debt to pile up, but the consequences are pretty much always the same. You’re left in a perpetual state of stress as you figure out how to pay off outstanding debt while still having enough money to live on.

Fortunately, there are some steps that you can take to get yourself ahead in your battle against debt. These budgeting tips can help you on your journey to becoming debt-free.

Get Organized

Of all of the tips for getting out of debt, getting organized is perhaps the most important. You can’t build a good plan to get yourself out of debt until you know how much money you’re bringing in and where it’s going.

Dave Ramsey, one of the most prominent names in the world of personal finance, calls this the “every dollar” approach.

You probably know how much money you make each month. Start with that figure, and then start writing out (or typing if you prefer taking a digital approach) how much you spend every month.

This list should include your monthly bills like mortgage or rent, electricity, and water. You’ll also want to add your debts to this list. Even if you’re currently just making the minimum payment on your current debts, write those numbers down.

This budget is going to serve as your road map on your journey to becoming debt-free. Being organized from the beginning is the most responsible, important step that you can take.

Find Places to Cut Back

Now that you know where every dollar is going, you can identify some areas where you can tighten the belt and cut back on your spending. Some monthly costs are unchangeable.

Your power company isn’t going to lower your monthly bill. Your cell phone provider isn’t going to stop charging you what they’re been charging you. However, you can find money that you’re spending that you can save.

How much do you spend each month dining out?

Most of us spend money every morning on a cup of coffee when we can save by making our coffee at home. If you’re going out to dinner two or three nights each week, you’re wasting money that can be put toward your debt.

Break Down Your Debt

Once you have a list in place that covers how much money is going out, you’ll need to break down your debts. Things like your monthly utility bills won’t be a part of this list.

This is because those monthly payments don’t have interest rates. Since the primary purpose of this budget is to tackle your debt, you’ll want to make a list of all of the entities to which you owe monthly repayments.

This can include everything from your car loan to your student loan debts.

Include the following information on this list:

• Type of debt (mortgage/rent, student loan, car loan, credit card)

• Name of the lender or company

• Total balance (you’ll update this as you go through the process)

• Interest rate (usually represented as a percentage)

• Monthly payment

This breakdown of your monthly debts is something that you’re going to get very familiar with through this process.

It’s easy to assume that some debt is more important than other debts, but without the proper information, you may prioritize the wrong debts first.

We recommend putting this list on a separate page of your written or typed budget from the monthly organizational list that you’ve already made because you’re going to be making changes to this part along the way.

Contact Your Lenders

For the sake of this approach to paying off debt, we’re going to refer everyone you owe money to as a lender.

Technically, that term is reserved for companies that lend you money for student loans, home ownership, or purchasing a car, but let’s refer to credit card companies and other entities as lenders, too.

After all, your debt is the result of spending money that they allow you to spend.

It’s not always the case, but sometimes you can negotiate different rates with some lenders. However, you should use this approach carefully.

Some lenders who allow you to negotiate a different rate do so with the understanding that it will damage your credit score. Ideally, this process of paying off debt will include improving your credit score.

Don’t assume that the lenders are going to be on board with renegotiating your monthly repayments. Some of them may refuse to do so outright, and they’re within their rights to do so.

However, when you’re drowning in debt, you need to be willing to try all of your available options. Desperate times call for desperate measures, and debt can leave you desperate.

Choose Your Strategy

There are different methods that you can take to pay off your debt. The route that you take is completely up to you, but once you choose a method, you need to be willing to stick to it.

Typically, people take one of two methods to pay off debt, and we’ll break both of those down for you.

The first option is known as the debt snowball approach. This involves paying the minimum monthly payment on all of your debts except for your smallest one.

Hypothetically, let’s say that your current debts look like this:

• Credit card: $1,100
• Student loans: $11,500
• Car loan: $16,700

You probably have more than three outstanding debts, for the sake of getting organized, we’re going to use this model. Under the snowball method, you would continue making the minimum monthly payment on your student loans and your car loan.

Meanwhile, every dollar that you can save each month by cutting back on certain areas would go toward your credit card payment.

Once you’ve paid off the credit card, you’ll take the amount that you were paying on it along with any other extra money that you’ve found along the way and start paying down your student loan debt while maintaining the minimum payment on your car loan.

Eventually, you’ll be able to eliminate all your debt.

The debt avalanche method switches things around and focuses on higher debts first. More specifically, this approach focuses heavily on debts with the highest interest payments.

Instead of focusing only on the balance, this method teaches that you should make the minimum monthly payment on all of your outstanding debts and put any extra money toward the debt with the highest interest rate first.

Once that debt’s eliminated, you move on to the next debt with the highest interest rate. This allows you to focus more on getting rid of debts that are growing each month.

Start Making Changes

Whatever method you choose, rest assured that you’re making the right decision for your financial future.

Choose a method that works for you and commit to following through until you’re living debt-free. You can do it!