A budget to get out of debt: what makes one actually work?

A budget that gets you out of debt does three things: it lists every debt, it finds money above the minimum payments in your take-home pay, and it keeps your total debt payment fixed while you pay off one debt at a time. The fixed total does more of the work than people expect. Credit card minimums shrink as the balance shrinks, so a plan that simply follows them can take close to two decades.

The steps below use one household’s numbers. They are illustrative, but every result was computed month by month.

List every debt with three numbers

For each card, store card and loan, write down the balance, the APR and this month’s minimum payment. All three are on your latest statement. Include debts that are easy to forget, like a payment plan with a hospital or a loan from a family member you have promised to repay. Federal student loans have their own repayment options, covered in our guide to student loan repayment plans, so settle on a plan for them before adding them to the list.

Our example household owes three debts:

• Credit card: $4,500 at an APR of 24%. The minimum is 1% of the balance plus the month’s interest, $135 this month.
• Store card: $2,000 at an APR of 27%, same formula, $65 this month.
• Personal loan: $2,700 left at an APR of 11%, with a fixed payment of $125.

That is $9,200 of debt and $325 in minimum payments. If the household pays only the minimums and lets the card minimums fall along with the balances, the last card is paid off after 224 months, almost 19 years, and the interest comes to $11,533.92. Our piece on the minimum payment explains why the formula stretches the debt out that far.

Use your statements instead of a spending diary

You don’t need to spend a month or two logging purchases to learn where the money goes. Your last two or three months of bank and card statements already show it. Add up each category: housing, utilities, groceries, transportation, insurance, and then everything else, from restaurants to subscriptions to shopping. Start from take-home pay, not salary, because taxes and payroll deductions never reach your account.

If you prefer a worksheet to a spreadsheet or an app, the CFPB’s Your Money, Your Goals toolkit has free ones for income, spending and debt.

For the example household, a month looks like this:

• Take-home pay: $4,300
• Essentials: $2,700 (rent $1,450, utilities and phone $260, groceries $520, transportation $320, insurance and prescriptions $150)
• Minimum debt payments: $325
• Everything else: $1,275

That last line is where the plan gets its money. All of it was being spent, which is why the balances barely moved.

Find the extra money, then freeze the payment

Go through the flexible spending and choose cuts you can keep up for a year or two, not for one heroic month. The example household found $225:

• Two streaming services and an app subscription it rarely opened: $55
• A gym membership it had stopped using: $40
• Packing lunch three days a week: $85
• Two fewer takeout dinners a month: $45

Now the step that matters more than the cuts. Commit to paying a fixed total every month: here, this month’s $325 of minimums plus the $225, or $550. It stays $550 even as the card minimums fall, and when a debt is paid off, its payment moves to the next debt instead of back into spending.

Here is what each version costs, with no new charges on the cards:

Freezing the payment at today’s minimums, without cutting a dollar, takes the payoff from 224 months to 41. Adding the $225 brings it down to 20 months and saves another $2,281.14 in interest.

To see what a fixed payment does to one of your own cards, use the payoff calculator:

Decide which debt gets the extra

Every debt gets its minimum, and the rest of the $550 goes to one target. You can aim it at the highest APR (the avalanche method) or at the smallest balance (the snowball). In this example the store card has both the highest rate and the smallest balance, so it goes first either way and is gone in month 8.

After that the two orders split. Highest rate next means the credit card, then the loan: debt-free in 20 months with $1,675.44 in interest. Smallest balance next means the loan, then the card: 21 months and $1,802.00, which is $126.56 more. A gap that small is a reason to pick whichever order you will stick with. Our avalanche vs. snowball comparison shows when the gap gets large.

Automate it and protect it

1. Set autopay for the minimum on every account. A missed payment brings a late fee right away, and once it is 30 days past due the lender can report it to the credit bureaus.
2. Schedule the extra as a separate payment to the target debt, a day or two after payday, so the money is gone before it can be spent.
3. Stop charging on the cards you are paying down. While a card carries a balance, new purchases usually accrue interest from the day you make them, because the grace period is lost until you pay in full. Our guide to how card interest is calculated has the details.
4. Keep a small cushion. One car repair put on a card can erase two months of progress. If you have no savings at all, send part of the extra to a starter fund first; our emergency fund guide suggests how much.
5. Send windfalls to the target. In the example, a $1,000 tax refund paid to the store card in month 3 cuts the plan from 20 months to 18 and saves $360.64 in interest.

Review the numbers every few months. When a raise comes through or a debt disappears, add the freed-up money to the fixed payment rather than to spending.

If the numbers leave nothing extra

If take-home pay minus essentials and minimums is close to zero, canceling subscriptions will not close the gap. Call your card issuers before you miss a payment and ask about a hardship program, or ask a nonprofit credit counselor about a debt management plan, which our comparison of credit counseling and debt settlement explains. If your payment is manageable but the rates are the problem, a debt consolidation loan or a balance transfer can lower them, as long as the cards stay paid off afterward.