How to Budget for Debt Reduction

If you find yourself overwhelmed by the amount of debt you have, it may be time to start budgeting more closely so you can allocate more money toward debt reduction. Debt can be incredibly costly, with interest charges alone on a debt of $10,000 at 12 percent interest costing $100 per month. If you have the discipline to create a budget and stick to it until your debts are paid off, you will be rewarded with a surplus of income to put toward things that matter to you, like a retirement account or a special vacation.

Instructions

1

Calculate your monthly take-home income from all sources. If you are paid every other week, multiply this paycheck amount by 2.17 to calculate your average monthly income.

2

Track your monthly spending for at least one month, writing down everything you spend money on. This includes not only large expenses like your rent or mortgage, but also small items such as a latte, pack of cigarettes or snack from a vending machine at work.

3

Add up the amounts you spent in each broad category, such as insurance, utilities, personal care, entertainment, groceries, nongrocery food, gas and clothing.

4

List all of your debts with the highest interest rate debts at the top of the list. Also write down each debt's current minimum monthly payment.

5

Add together the minimum payments for all of your debts. This is the amount you are going to budget for debt reduction. Although your minimum payments will decrease over time, continue to put this full amount toward debts in the form of extra payments, starting with the debt at the top of the list.

6

Subtract the debt payment from your monthly income. Also subtract any fixed expenses that are absolutely necessary for you, such as your health insurance, car insurance and housing costs.

7

Allocate your remaining monthly income between the other categories in which you spend money during the month. If possible, also allocate at least $50 to $100 per month to put in a savings account for emergency expenses, if you do not already have emergency savings. Your total allocations cannot exceed your remaining monthly income, so you may have to allocate less than you are accustomed to for spending in some categories.

8

Create an envelope for each spending category. Put your allocated amount in each envelope at the beginning of the month and use only that money to spend in that category during the month. Do not use credit cards at all.

9

Review your allocations after the first month. If you ran out of money in one envelope and had plenty left in another, consider revising your allocations for the next month by moving money from one category to another.