How to budget to pay off debt

Posted on 28 September 2022

Written by Jeff Adiken

Debt has various consequences, and can cause a number of problems including mental health issues and consequences on your lifestyle. As debt has an impact on your credit score, and often leads to harassing calls from debt collectors or collection agencies, most of us want to pay off debt fast. An important part of paying off debt includes budgeting to ensure you are able to keep the funds aside to go towards your debt payments. The stricter you can be with your budget, the faster you are likely to pay off your debt and begin a fresh financial future. Budgeting is a bold move that will get you closer to your goal of debt relief. In this article, we will explore some of the best ways for you to understand how to budget to pay off debt.

How to budget to pay off debt

Budgeting is perhaps overlooked as a key strategy in paying off debt. It enables you to focus on paying off some debts without incurring debt elsewhere. Given that there are a number of strategies for paying off your debts, your first port of call should be to create a realistic budget. This enables you to factor in all of your bills and payments so that you do not forget some in favour of others. Check out our top tips on how to budget – a spreadsheet is often a great way to start. Here are some of the best steps to take when it comes to how to budget to pay off debt:

Identify all your debts

The first step in budgeting to pay off debt should be to list out and recognize all that you owe. Start off by writing down a list of your debts, or capturing them in a spreadsheet. For each debt, document carefully the total amount that you owe, the interest rate applied to the debt, and the minimum monthly payment you need to make. This list should include all debts, from mortgages to car loan debts to credit card debts, payday loan debts, and so on.

Review your budget

Budgeting enables you to better manage your money, in this case to create a plan for repaying your debts. It will help you to unravel how much money you receive, spend, and save each month. This can then help you to balance your income with your expenses, and better control your spending to reach your financial goals. You should capture exactly how much you earn each month, and all of your outgoings and expenses. Reviewing your budget can also help to you curb your spending, allowing you to keep track of it and see where you can cut costs.

Reduce your expenses

By cutting down on even the smallest expenses each day, your money can go further to help pay off your debt. This could include reducing your gas costs and taking public transit wherever possible, opting to cook instead of dining out or getting takeout, and even making your coffee at home to save costs. These little things can all help with learning how to budget to pay off debt. You should also avoid using your credit card to avoid getting into further debt. Check out more of our tips to combat the increased cost of living to save cash where you can.

Choose a debt repayment strategy

Now that you have your budget and a list of all your debts, you should begin your plan to make your debt repayments. This will vary depending on the kind of debts you owe and the amount you need to repay. You may also wish to choose a timeframe to work towards for your debt repayment. Make sure it is reasonable and realistic to ensure you can maintain progress and motivation. Of course, the sooner you can make your repayments, the less interest you will pay overall.

Look for ways to increase your income

By increasing your income, you can earn additional funds to go towards repaying your debts much more quickly. There are various ways you can do this – you may wish to sell some of your assets for some additional cash. Perhaps you create crafts or clothes as a hobby which you may be able to sell. Or, perhaps you can pick up a side hustle like babysitting, dog walking, or sewing for some extra bucks.

Work on rebuilding your credit score

Owing debt undeniably has a negative impact on your credit score. Having a bad credit score has a knock-on effect – it can prevent you from borrowing or taking out credit in the future. Some employers may even run a credit score check against you before offering you a role. Landlords will often run one too before enabling you to rent their property. There are some simple ways to rebuild your credit score, and at Spergel we are here to help you. You can improve your credit score by taking some simple measures including making your payments on time, not using all of your available credit, and not applying for any new credit.

Making your debt repayments

Which debts you decide to pay off first is fully dependent on the types of debt you owe, and what will motivate you to repay them as quickly as possible. Typically, there are two common strategies for repaying debt in Canada:

The debt snowball method

The debt snowball method works by making the minimum payments on all of your debts. You then use any additional funds you have from your budgeting tactics to repay the debt with the smallest balance. You work to repay this debt, before moving onto the next smallest balance. You continue in this manner until all your debts are repaid. The debt snowball method works by the logic of motivating you, giving you the instant gratification and accomplishment of having repaid a debt. While it is motivating, it could cost you more in interest payments over time.

The debt avalanche method

The debt avalanche method is a strategy focused around paying off your most expensive debts first – those with the highest interest rates. Once again, you will make the minimum payments on all of your debts. After this, you will use your additional funds to go towards paying off the debt with the highest interest rate first. Once this is repaid in full, you will move onto the next. It will save you plenty of money in interest overall if you choose this debt repayment strategy. Often, payday loan debts have the highest interest rate, followed by credit card debts.

Communicate with your creditors

If you are struggling to budget to pay off debt, you need to communicate effectively with your creditors. The most effective way to handle them is to discuss your financial situation with them directly. While there is no guarantee that they will sympathize with your situation, they may be able to try and help you. They could do so by offering a lower interest rate on your debt. They may also extend your repayment period, so that you can make your payments over a longer period of time to reduce the monthly payments you need to make. They could even decide to consolidate your debts into one loan to make it easier for you to repay.

Speak to a Licensed Insolvency Trustee

If, despite taking the measures outlined above, you are still struggling to budget to pay off debt. You may wish to speak to a Licensed Insolvency Trustee, the only professionals legally able to file all forms of debt relief in Canada. They can help you in a plethora of ways, from clearing your debt to helping you with money management so that you curb your spending in future. Typically, a free consultation with a Licensed Insolvency Trustee will allow them to review your financial circumstances and recommend a pathway to debt relief. Here are some of the common forms of debt relief they can assist you with:

Debt consolidation loan

If you have multiple different debts, a debt consolidation loan may be a wise option for you. A Licensed Insolvency Trustee can advise you on this, and help you with knowing where to begin. A debt consolidation loan is a new loan you take out that quite literally combines your various separate debts. As well as simplifying your debts and allowing them to be more organized, debt consolidation loans often offer a great advantage. This is commonly the reduction or complete clearance of your interest rate, making your debt repayments more affordable. Condensing your debts also often lowers your monthly payments, meaning you may be able to make your debt payments more quickly. To be eligible for a debt consolidation loan, you must have an acceptable credit score and sufficient income to make your monthly payments. Some financial institutions may offer debt consolidation loans with an interest rate much higher than those you are trying to consolidate, so be sure to shop around for different rates when looking for products.

File a consumer proposal

A consumer proposal is the process of putting forward an affordable monthly repayment amount to your creditors. A Licensed Insolvency Trustee will help you to do so, and negotiate with your creditors on your behalf. Creditors are likely to accept the terms of a consumer proposal as they are usually more favourable to them than the alternative debt relief option, bankruptcy. Consumer proposals reduce your debt by up to 80%, and allow you to keep your assets. Another advantage is that they trigger a stay of proceedings, which offers you full protection from your creditors. At Spergel, we have a 99% acceptance rate on any consumer proposals we file.

File bankruptcy

A bankruptcy is the process of assigning any non-exempt assets over to a Licensed Insolvency Trustee in exchange for the clearance of all unsecured debts. These assets go towards the repayment of your debts. Contrary to popular belief, filing bankruptcy does not mean you lose all your assets. In fact, as your mortgage and car loan are secured debts, provided you keep up your payments you may keep your home and vehicle. Bankruptcy offers a fresh financial future, and will put a stop to any harassing calls from debt collectors or collection agencies for good.

To learn more on how to budget to pay off debt, book a free consultation with an experienced Licensed Insolvency Trustee at Spergel. We will help you to review your debt situation, work out what you need for the future, create a budget, and find a form of debt relief that works for you. No matter how bad you may feel your circumstances are, we are here to help you find a solution.

Jeff Adiken

Jeff Adiken

Jeff Adiken is a Certified General Accountant and Chartered Insolvency and Restructuring Professional with over 18 years’ experience as an LIT (Licensed Insolvency Trustee). He also manages all of Spergel's personal insolvency offices and is our resident expert on credit card debt and debt-free living. When his 'manager hat' comes off at the end of the day, Jeff is happiest spending quality time with his family at home.

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