HOW TO MAKE A BUDGET TO PAY OFF CREDIT CARD DEBT

Can you remember the days before everyone had smart phones and you had to either learn the area where you were driving or rely on a physical map to guide you? I can remember getting lost SO often before GPS and Google maps existed. I had such a hard time getting my bearings especially if I was in a new city. Not having a budget to pay off credit card debt is just like not having a map to guide you when you’re driving. It makes it difficult, if not impossible, to get you where you want to go. 

Did you know 95% of Americans carry a credit card debt and 33.7% of them can’t pay off the balance each month? So if you’ve found yourself in this situation, you’re in good company with plenty of other people. And people find themselves in credit card debt for myriad reasons– maybe you lost a job, went through a divorce, or had other emergency expenses arise that you had to put on a credit card. Maybe you simply weren’t living within your means. Whatever the reason, there’s no reason to feel shame about your debt. But there’s certainly reason to feel the need to make a change so you can live debt free. You can’t pay off credit card debt without learning how to manage your finances. In other words, you have to make a budget to pay off credit card debt. 

STEP 1: FIGURE OUT HOW MUCH DEBT YOU HAVE.

The first thing you should do to make a budget to pay off credit card debt is to figure out exactly how much debt you have. You can list it out on a piece of paper or track it all in one easy to see place with an app like Paidback. With Paidback you simply use your online credentials to link each of your credit cards to the app and it will automatically include your interest rate. Then, you’ll be able to see each of your debt accounts in one easy to see place so that it’s easy to keep track of. If you list your debt out by hand be sure to include your current interest rate. This will help later in figuring out which balance to pay off first. 

STEP 2: FIGURE OUT YOUR MINIMUM PAYMENTS.

The next thing to do to make a budget to pay off credit card debt is to figure out what your minimum payments are on each of your credit cards. Again, you can do this manually on a piece of paper or a spread sheet, or use Paidback to help. Either way, you’ll need to come up with your minimum payments so you can figure out how much you owe each month and whether you have enough income to cover your minimum payments as well as extra payments. 

STEP 3: TRACK EXPENSES & INCOME.

In order to create your budget, you’ll need to track each of your expenses. You can track them with an app like Mint or manually by reviewing your account statements. If you use cash, you’ll also have to keep track of that manually. But count up each of your expenses. Be sure to include irregular expenses that you may incur annually, like annual car insurance or registration payments.  It’s a good idea to use at least 3 months worth of payments (12 months is ideal) to see what you are spending. I recommend reviewing 12 months of spending because of irregular expenses like annual car registration, for example. 

Once you have a good idea of what your expenses are, you can categorize them by “variable expenses” and “fixed expenses.” Fixed expenses are expenses that stay the same every month, such as your mortgage or car payment. Variable expenses are expenses like food, travel, and clothing and can change each month. Variable expenses are typically easier to cut back on, so it’s important to distinguish between the two. 

When you’ve tracked your expenses, you’ll be able to identify areas where you can make changes as you set your actual budget in the following step. 

In addition to tracking each of your expenses, you need to document your income. Add up all of your monthly income from every source. If you have one job, this is obviously fairly easy to do. But take into account any side hustles or jobs you’ve taken on recently and factor that in. 

STEP 4: SET GOALS BASED ON EXPENSES. 

After you’ve tracked your expenses and categorized them, it’s time to actually create your budget to pay off credit card debt. You’ll do this by setting goals in each category of your budget based on your past spending. For example, say you noticed that in the past three months, you spent $400 on groceries one month, $540 the next, and $450 in the third month. You could set a goal of $400-$450 to spend on groceries in the upcoming month and then work to stay within that goal. 

This of course only works on variable expenses. Your fixed expenses like your mortgage/rent, car payment, etc will be the same every month, so it’s easy to know how much you’ll need to pay.

Do this for all of your necessary expenses, including minimum debt payments. In addition to these necessary expenses and minimum payments, you’ll need enough money left over each month to make extra debt payments. You should have a plan for every dollar of income you have– including for extra debt payments. 

STEP 5: REDUCE EXPENSES & INCREASE INCOME. 

Once you’ve set your budget, you can then work on reducing expenses and increasing income. The more you can reduce expenses and increase income, the more money you’ll have available in your budget to make extra debt payments to get out of credit card debt even faster. Is there anything you can cut out of your budget, even temporarily? Maybe you can work out from home instead of paying for a gym pass. Swap cable for a cheaper subscription service. Use coupons and cash back apps for your groceries and when you grocery shop, make sure your shopping the things that are on sale. Likewise, focus on doing things to increase your income. You could sell items around your house, take on a temporary second job, or ask for a raise. More ideas on how to increase your income here. 

STEP 5: MAKE BIWEEKLY PAYMENTS EACH MONTH.

Once you’ve officially created your budget to  pay of credit card debt, and importantly, realized how much money you can make towards extra payments, you can start making those extra payments. One way you should do this is by making biweekly payments every month. You’ll do this by dividing the amount you want to pay each month into two and pay it biweekly. When you make biweekly payments on your credit card instead of just one payment a month, you actually end up spending less money on interest since you make more payments per year. For example, if you plan to pay $1,000 a month in extra payments, make a half-payment every two weeks of $500 instead. You will end up paying $13,000 in a year, instead of $12,000 monthly, or $1,000 times 12 monthly payments.

In addition to making a budget to pay off credit card debt, you could consider taking on a personal loan to pay off the balance of your credit card debt, which will give you a lower interest rate to save you money and help you pay it off faster. I highly recommend using Credible where you can compare multiple interest rates with multiple lenders here. 

Just like you need a map to guide you driving, you’ve got to make a budget to pay off credit card debt. The extent to which you stick to that budget is the extent to which you’ll succeed on paying down your credit card debt. And if you need more tips or you’d like to see my own personal budget, I send out a monthly newsletter showing how much money I spent for the month and where it all went– including my own extra debt payments. You can get that newsletter here. 

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