Budgeting for Debt Repayment: Tools and Tips to Stay on Track

Is All Debt Bad Debt?

Having debt is not inherently bad. Debt simply means you borrowed money that you are repaying, and unless you are one of the very few people in this world who can pay for everything in cash—even purchases worth thousands or millions of dollars—this is simply a fact of life. Taking out student loans, auto loans, mortgages, business loans, and other loans are all ways normal people find themselves going into debt over the course of their lives.

Debt can be thought of in terms of good debt vs. bad debt. Good debt encompasses things like mortgages or business loans, which will help you build financial security in the long run. Bad debt is things like credit card debt or payday loan debt. These loans tend to have higher interest rates and may make it harder for you to build financial resilience.

However, things aren’t that simple. Credit card usage, for instance, is one of the best ways to build a good credit score in the US. Putting a $10,000 family vacation to Hawaii on a credit card might be considered “bad debt” by some, but it could be an unforgettable experience that you don’t regret having, even if you now need to pay it off. And this doesn’t even address the tricky situation of medical debt, which is often unforeseen.

So, not all debt is bad debt. But when it comes to managing debt, even good debt can still be a hassle. That’s why step one is to understand all your debt.

Understanding Your Debt

If you’ve ever been in a position of financial stress and hardship, you might remember having had the impulse to avoid checking your bank account or opening your pile of bills for fear of what you would find. While that sort of avoidance-centered approach might temporarily make you feel better, it’s not very good for actually solving your problem.

Before you can effectively manage your debt, you need a clear understanding of what you owe. Start by listing all your debts. This can include credit cards, student loans, medical debt, car loans, mortgages, business loans, and personal loans. For each debt, list the total amount owed, the interest rate, and the minimum monthly payment. This will give you a complete picture of your debt situation and is the first step in crafting a budget that will get you free of debt.

Understand Your Income and Expenses

This is the next part of budgeting for managing debt. In addition to understanding what you owe, you must understand how much money you have to work with. Detail all your income, including your salary and any passive income, and your regular expenses, like rent, utilities, or groceries.

Once you have a clear view of your income and expenditures you can identify how much you can realistically afford to allocate toward repaying your debt.

50/30/20: A Rule to Know

One effective method for budgeting is called the 50/30/20 rule. Under this paradigm, you allocate 50% of your income to necessities (i.e., rent, groceries, and such), 30% to wants (i.e., eating out, your new game console, a new swimsuit for the summer), and 20% to savings and debt repayment. If your focus is on repaying debt, you could adjust this to increase the percentage toward debt reduction and away from “wants.” Everyone likes spending some money on fun, non-essential things, but if, in the long run, it helps you get your debt under control a little faster, it might be worth it.

Tools for Managing Debt and Tracking Budgets

In the past, you would have to calculate this all by hand. Fortunately, in today’s app-based world, we have alternatives. Specialty tools can be vital in assisting you in managing your budget and debts. Choosing the right tools can greatly simplify this process.

Financial Apps

Various banking apps link directly to your financial accounts and help you track your spending in real-time. Use your preferred app to categorize expenses, track upcoming bills, and send alerts when you’re running over your budget. Many of these apps offer personalized insights into spending habits and can identify areas where you can cut back. Our Digital Banking features MyMoney Trail to link all of your accounts in one place to track spending, create budgets, and manage debt.

Spreadsheets

If you prefer a more hands-on approach, spreadsheets like Google Sheets or Microsoft Excel are great tools for those who prefer to crunch their own numbers. You can create your own detailed budget worksheet to track income, expenses, and debt repayments or start with a template.

Debt Repayment Calculators

Online repayment calculators can help you understand how changes in your debt repayment can affect the overall interest you pay and your debt-free date. By entering different repayment amounts, you can plan the most effective strategy to pay off your debts sooner.

For instance, consolidating your debt to replace high-interest loans with lower-interest ones is a time-tested method of paying back your debt.

How To Stay Committed to Your Debt Repayment

You’re only human. Staying committed to a multi-year process of debt repayment requires consistency and motivation. Here are some tips to help you stay on track.

• Set clear, achievable goals. Don’t just say, “I want to pay off my debt.” Instead, set specific targets like, “I want to pay an extra $100 toward my credit card debt every month.”
• Use visual reminders. Visualizing your process can be very motivating! Create a debt repayment chart and fill it in as you pay off more of your debt. Seeing the amount you owe decrease can give you an affirmation of your progress.
• Celebrate milestones. Set milestones in your debt repayment plan, like paying off a particular credit card or reducing the amount of a given debt by half. Treat yourself (in budget-friendly ways) to acknowledge this progress.

Managing debt is a journey that requires patience, discipline, and the right tools. It also can benefit from having a great financial advisor and planner. If you want to get on track to repay your debt today, contact the knowledgeable staff at MHV, and let’s get started.