How to Make Debt Repayment Part of a Balanced Budget

If you have debt, there’s a good chance you’d prefer you didn’t. Debt can be pretty necessary (see: buying a home), but once you have it, it has a tendency to stick around and make things more difficult than they would otherwise be.

The trouble is finding the means to repay that debt, especially when you’re already facing a tight budget. So how do you make debt repayment a healthy, unobtrusive part of your balanced budget? There are four key steps:

Step down your variable spending

Budget items usually fall into one of three categories: fixed, variable, and periodic. Fixed expenses are the same every month (like your rent or car payment), variable expenses will change a little from month to month (like grocery and electric bills), and periodic expenses may be fixed or variable, but don’t occur every month, so they’re a little harder to plan for (like buying Christmas gifts or registering your car).

While there are ways to reduce fixed expenses (move to a cheaper house!), they tend to be a bit more work. So your focus should be on reducing variable expenses. And one of the most effective ways to make reductions that stick is to gradually step down your spending.

This means rather than rewriting the book on how you eat or how you entertain yourself, you focus on making small reductions in every category. Go out to eat 25 percent less than you normally would. Adjust your thermostat by one degree. Carpool once a week. You don’t have to make any major lifestyle changes, just a series of small, lifestyle tweaks. This should help free up a little extra money every month.

Take advantage of obvious savings

Another way to put this is: don’t be lazy. Coupons save money. Remembering your club card saves money. Buying bulk when it's appropriate adds up over time. Using promotions wisely and avoiding waste to the best of your ability are both good ways to save a little money here and there. The only guideline is that stop leaving money on the table, so to speak.

Again, there’s no need to overhaul your life or your values. Just don’t make sure you’re taking advantage of easy savings when they present themselves.

Pay over the minimum

Once we’ve figured out where the money comes from, we can focus on debt repayment. The most crucial piece of the equation will be your ability to pay over the minimum. Paying the minimum once in a while is fine, of course, and the minimum is infinitely better than no payment at all. But if your goal is to be debt-free, than you really need to make payments above and beyond the minimum.

This is because interest accrues every month (or, in many cases, every day). When paying the minimum, you’re basically in a slow motion footrace against those interest charges. You’ll catch up eventually, but it can take a long, long time. When you pay more, you can make a more serious dent in your debt’s principal, which will reduce your interest charges and bring your debt down that much faster.

Pay strategically and consistently

Finally, once you’ve created the space in your budget to make debt payments over and above the required minimum, keep it up until everything is paid off. This means never missing a payment, of course, but also not reducing debt repayment efforts once some of your accounts are paid in full. In other words, when you pay off an account, take the money you’ve been sending to that creditor and direct it towards another debt.

You should also be a little strategic with your payments. You can direct all of your extra debt paying flexibility towards your smallest debt in order to reduce the number of creditors faster; or you can focus on the debt with the highest interest rate first, which is likely to save you the most money in the long run. Either strategy can be a great way to reduce debt quickly, while saving money in the long run.

Repaying debt on a tight budget can be tricky, and it takes a little planning, but the results are absolutely worth it. If you need a little extra advice and guidance in repaying your debts on a tight budget, consider speaking with a trained debt and budget counselor. Counseling is free and a great way to find the best solution to your unique financial situation.

Article updated June 2020