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Are you looking for ways to budget when in debt?
Welcome to the club. Millions of Americans are recovering from debt as we speak. With US household debt recently surpassing $18.8 trillion, learning how to properly budget when paying off debt is one of the most useful personal finance skills you can learn today.
The thing is…
Budgeting when paying off debt is pretty much non-negotiable. If you don’t have a budget, recovering from debt isn’t possible. And if you let debts go unpaid for too long, creditors can take you to court to stop wage garnishment before it happens—or deal with it if it already has.
You’ll learn:
- Why budgeting when paying off debt is important
- The smart budgeting method to help you recover from debt
- How To Stop Wage Garnishment From Creditors
- 5 Budgeting methods that will help you recover faster
Budgeting When Paying Off Debt Is Important
When you’re repaying debt, budgeting isn’t just important. It’s life or death.
Imagine you’re juggling several debts and your creditors are constantly calling. Without a firm handle on where your money goes each month, it’s almost inevitable that you’ll miss payments. Then you’re faced with calls from collection agencies.
If you’ve never been threatened with legal action by a creditor, consider yourself lucky.
Lawyers are expensive.
Creditors will usually turn to garnishing your wages before they go to small claims court. Per ADP Research, approximately 2.8% of US workers had active wage garnishments through early 2024. If your wages are being garnished, it’s time to contact an Arkansas Wage Garnishment Attorney immediately and see what your legal options are.
Your budget is how you keep creditors from taking everything you own.
How To Budget When Paying Off Debt: The Smart Method
Making a budget that helps you pay off debt means leaving the nonsense at the door.
No complicated spreadsheets. No counting pennies so you can install that brand new $1,000 smart toilet everyone is raving about.
Simply:
- List your income
- List your fixed expenses (rent, utilities, insurances, etc.)
- List your debts and minimum payment
- Allocate any leftover income to your highest priority debts
- Cut unnecessary expenses ASAP
Boom. Done.
With this simple budget, you’ll allocate every single dollar you earn to something worthwhile. Housing, food, debt repayment. If there’s money left over at the end of the month, you can spend it on lowering your debt balances even faster.
The biggest mistake most people make when recovering from debt is trying to live the lifestyle they’re accustomed to. But the numbers don’t lie. If you’re in debt, you need to change something.
And that something is your lifestyle.
A smart budget helps you prioritize your spending so you can live to pay another day… without going broke doing it.
How To Stop Wage Garnishment From Creditors
Well, hopefully you stopped reading this article before your wages were garnished. But if they are being garnished, you’ll need to take action—fast.
Under federal law, creditors are allowed to garnish up to 25% of your disposable earnings. That means if you get a paycheck and have debt that’s being garnished, your creditor is allowed to take up to 25% of your earnings before you even see it!
Here are some tips to keep as much of your paycheck as you can.
- Understand the laws in your state. Federal wage garnishment laws are only guidelines. Some states offer more protections for employees than others. In fact, four states prohibit wage garnishment for consumer debts entirely. Arkansas allows the lowest wage garnishment amount of the Continental U.S. at 25% of disposable earnings.
- If you receive any kind of court notice about wage garnishment, act on it right away. This isn’t something you want to “deal with later.”
- Contact your creditors immediately and try to negotiate a payment arrangement. Most creditors would rather work with you than take you to court.
- Hire a lawyer to review your case. If you qualify, you may be able to stop wage garnishment based on state and federal exemptions.
Once again, the best way to avoid wage garnishment is to not let it happen. Budget carefully and seek legal counsel if you owe enough money for creditors to take you to court.
5 Budgeting Methods To Help You Recover From Debt
Right now, you’re looking for a budgeting method that will help you get out of debt as quickly as possible. No fluffy wallet stuff. Just hard, cold methods that work.
Below are 5 of the best budgeting methods for getting out of debt. Choose one (or two) that fits your situation and start using it today.
Use the 50/30/20 Rule… Sort Of
The popular 50/30/20 budgeting method involves splitting your after-tax income into three categories. 50% of your income is directed towards needs. 30% goes to wants. Finally, 20% gets tucked away in savings.
But what if we flipped that around?
Instead of saving 20%, you could use that money to crush debts. Here’s how the modified 50/30/20 method would look:
- Needs: 50%
- Wants: 10%
- Debt repayment: 40%
Much better right?
You still get a little something for your sanity, but you allocate way more money towards killing those debt balances.
The Debt Avalanche Method
If you want to recover from debt as quickly as possible, put all of your extra money towards the debt with the highest interest rate.
Why does this work?
Simple. High-interest debt balloons the fastest. If you have a debt with a high interest rate and you’re only making minimum payments, your balance is probably growing every month. Throw as much at that balance as you can until it’s gone, then move to the debt with the next highest interest rate.
It’s like a snowball rolling downhill. Gather as much momentum as you can then crush debt balances in your path.
The Envelope System
Want to feel like you actually handled money this month? Use the envelope system.
Get some envelopes and label them with your expense categories. When the envelope is empty, you can’t spend any more money that month on that particular thing.
Why does this work? Because it feels real.
Popping a credit card feels… easy. Writing a check feels meaningless. But handing over cold, hard cash that you physically have to pull out of your bank account? That hurts. And that hurt feels like real budgeting.
Automate Your Minimum Payments
One of the best ways to get out of debt is to ensure you make every minimum payment on time each month.
Set up every minimum payment to automatically come out of your bank account. That way, if you ever miss a payment, you know exactly where your money went.
You can then use any leftover money to pay your high-interest debts down manually.
What’s great about this method is that you’ll always stay on top of your minimum payments. Late fees, penalties, and lawsuits will no longer be a concern.
Write Down Every Purchase
Grab a pen and paper and get ready to write. You’re going to write down absolutely everything you spend money on for the next 30 days.
And that means everything. That morning cup of coffee you grab before work. Your daily Amazon Prime subscription. The chips you grab at the gas station because you’re starving.
Nothing is off limits.
At the end of the month, add up everything you wrote down and prepare to be horrified.
Most people have no idea where their money goes. Tracking your spending is the first step to getting out of debt. If you don’t know where your money goes, you’ll never be able to stop wasting it.
Congratulations, You Have A Budget!
Budgeting when paying off debt can feel next to impossible. But once you strip away the nonsense and focus on the important stuff, it’s not that hard.
Remember…
- Your budget when paying off debt should account for every dollar you earn
- Focus on allocating as much money as possible towards your debts
- Pay attention to your budgeting method and don’t get overwhelmed by flashy nonsense
- Try out one (or two) of the budgeting methods above to help you recover from debt
People who recover from debt are those who take action ASAP. They start budgeting immediately and never look back.
