Johnny and I started our debt payoff process at the beginning of the year, as many of you might be doing this year. The debt payoff process was daunting, exciting, sucky, rewarding, hard, overwhelming, and empowering. It brought out all kinds of crazy emotions. While we were paying down our loans, there was never a time when either of us wanted to quit. We both really wanted to be debt free as soon as possible, and that never, ever changed. What we both struggled with, though, were those day-to-day spending decisions that felt small but that could have potentially ruined our plan if we’d let them.
Ultimately, the success of paying off our debt depended on our ability to stick to our monthly budget. So here are our essential tips for having a successful budget while maximizing debt payoff:
Start backwards budgeting.
We recently did a post on backwards budgeting and why we’re all about it. This is how it works… before you set your monthly budget, first decide how much debt you’d like to pay off each month. Then create a budget that works for your debt payoff. If you can’t make a budget work for that number, ask yourself if you can make more money to make that debt payoff work. And ask this question seriously, not as a “Maybe I could…” when you really never would. If you still can’t make that debt payoff amount work, you may need to adjust it some, but the point is to make your budget work for your financial goals as much as possible. This year, Johnny and I really want to save 50% of our net income. Currently, our budget only allows for 25% savings. So we’re planning to make enough side income to make up for the rest. It won’t be easy, but it’s doable if we stick to it.
Set reasonable expectations.
While maximizing your monthly debt payments is extremely important, it’s just as important to set up a plan that’s realistic.This sounds like a contradiction to backwards budgeting, but I promise it isn’t. It’s just a reminder. Setting a super extreme budget that you can’t actually live with long term will just cause failure in the long run. You’ll get burnt out and defeated, and your debt will just sit there, collecting interest. That said, you should push yourself to pay down as much as is reasonably possible. Living a luxurious lifestyle while paying down debt shouldn’t go hand in hand. Money should feel tight. A good rule of thumb in making your budget is to ask yourself what you can reasonably give up over the next few years, and give it up. Yes, years. Sure, we could all live off rice and beans for a month, but it’s not something we’d be willing to stick to for years.
Be prepared to fail.
Even if you set up the perfect budget and debt payoff plan, you will overspend at some point during the process. Or maybe a huge expense will come up that you weren’t expecting. It might even be the very first month. That’s okay. The key is to be consistently trying. When we moved to New York City mid-debt-payoff in 2010, we lowered our debt payments significantly for a few months until we were settled, which messed up our plan for a bit. But then we got back on track and kept on truckin’. Consistent effort, not perfection, is the key to having success.
Have a long-term plan.
While it’s important to figure out how much debt you can feasibly pay down each month, you should also make a plan that sees your debt payoff to the very end. You should be able to answer these kinds of questions: When will your debt be eliminated? How much debt will you have paid off six months from now? You get the idea. Because your day-to-day spending will be your biggest hurdle in paying off your debt each month, you’ve got to be able to have a big-picture perspective to combat that. Johnny and I typed out our plan, printed it off, and hung it up in our office so we could see the visual each month. Seeing the big picture down on paper helped keep us going.
Start a debt snowball.
When we paid down our loans, we used the debt snowball method, and we highly recommend it. The two most common methods are the debt snowball and the avalanche method. The debt snowball method attacks smallest debts first, and the avalanche method attacks largest loans. We loved the little psychological victories that came from paying off our smaller loans first, as they really helped contribute to our motivation to keep on keepin’ on. If you’d like to know more about the debt snowball method, you can read this post where we wrote all about how to start one.
Have a monthly pow wow with your S.O.
If you’re paying off debt with someone else, communication is a major key to success. You both have to be on the same page each and every month. Your spending needs to be transparent. If one or both of you is slipping, you’ve got to regroup. That’s what the monthly pow wow is for. At the end of each month, assess how you did. Talk about how you could do better. And then plan for the month ahead. This will be especially important in the beginning, until you adjust to your budget.
And so ends our first “maximizing your budget” session. Each person’s debt payoff plan is going to be different. If you have any specific questions we didn’t touch on, feel free to shoot us an email or throw out a comment and we’ll do our best to answer them. Any other tips you’d add to this list? Let’s hear ’em!