How to Prioritize Debt Payments in Your Budget

Debt is temporary, and you can get past it. Whether you seek debt relief assistance or tackle it on your own, there are clear, specific steps you can take to become debt-free. The first is to develop a realistic monthly budget, which begins with prioritizing which bills really need to be paid. 

We’ll look at understanding which debts should be paid first, and which can wait.

Steps to Prioritize Your Debt Payments

To prioritize your debts, start by listing them. Include all the details about each debt, such as the payment amount, balance, due date, interest rate, and type of debt. Then reorder them according to the consequences you would experience if you let the debt lapse. The debts at the top of the list should be the ones that are non-negotiable and must be paid. If you can’t afford all your debt payments, you’ll want to prioritize the debts at the top of your list.

Here are the detailed steps to prioritize your debts:

1. Make a list of all your debts.

2. Next to each debt, jot down the interest rate, balance, and due date.

3. Note what's at stake for each debt. This is the thing you could lose if you don’t pay the bill. For example:

   1. Car loan = my car 

   2. Mortgage or rent = my home

   3. Credit card = my credit score and possible debt lawsuits

4. Create a budget if you don't have one. 

5. Comb through the budget, looking for expenses that aren't as high a priority as paying off debt. The goal is to find more money in your budget each month for debt.

6. Go back through the list, numbering each debt in order of importance. For example, most people don’t want to risk losing their home. Your mortgage or rent payment typically takes the number one position. 

7. Secured debts like car loans are usually higher priority than unsecured debts like credit cards. Anything you're unwilling to have repossessed by the lender must be high on your list. 

Let's say you're sitting next to your best friend, and you're both prioritizing debts. Your lists could look quite different, not just because you have different debts, but because what's unimportant to one of you may seem vital to the other. That's okay. The point is to create a household budget you can stick to. 

Pick a Repayment Strategy

Creativity could help you deal with debt. Here are three of the clever debt payoff strategies people often use.

Debt snowball method

The snowball method helps you tackle debt by focusing on one small win at a time and building momentum. Here’s how it works:

• List debts. Arrange them in order of balance, from the smallest to the largest (don't worry about interest rates).

• Make minimum payments on all but the debt with the smallest balance. 

• Decide how much extra you can afford to pay. For example, if the minimum payment on the smallest debt is $75 and you can afford to add another $75, make a $150 monthly payment until that debt is paid off.  Focusing on your smallest debt puts you on the quickest path to your first payoff.

• Add the entire $150 payment to the minimum payment on the next debt and continue until it’s paid off. In this way, your monthly payment should get bigger every time you clear a debt and move to the next one.

• Repeat the process until all debts are paid off. 

Debt avalanche method 

The debt avalanche method focuses on minimizing how much interest you pay. It works the same way as the snowball method, but you list the debts according to their interest rates and focus on the highest one first. Your first payoff could take longer if your most expensive debt is large. But this method has the potential to save you money in the long run. 

Hybrid approach

The hybrid approach combines the quick win of the snowball method with the avalanche method of paying off high-interest debt early. Here's how the hybrid approach works:

• Begin by paying off your smallest debts. It not only builds momentum, but also helps you stay motivated. 

• Arrange your larger debts by interest rate and prioritize the most costly one.  

Which Debts Do You Prioritize if You Can’t Afford Them All?

Look at each debt in your budget, and ask yourself, "Can I live without this?" For example, can you get by without your car? Could you sell it and use the money to clear the debt? If not, your car payment should be near the top of your list. 

Housing, transportation, food, and utilities are non-negotiable expenses for most people, but you might be able to reduce them. Insurance and healthcare are usually high on the list of important budget items, too. The rest is up to you. If there isn’t enough money, pay the bills at the top of the list first.  

Common Mistakes That Keep People Stuck in Debt

Millions of Americans have found their way out of debt, and you can do it, too. Avoid these common mistakes that keep people stuck:

• Don’t count on credit cards to pay everyday expenses. It's easy to run short of money toward the end of the month and find yourself pulling out a card to pay for everyday expenses. If that happens, it's a sign that you need to tweak your budget to bring your living costs below your income.  

• Don’t live without an emergency fund. Even while you’re paying off debt, you need an emergency fund. It can be small while you’re paying off debt. A thousand dollars is a good goal. Once your debt is repaid, you’ll want to build it up to a higher balance. Your emergency fund is the shield between you and new debt.  

• Don’t make minimum payments. Pay extra toward your debt. Minimum payments are how credit card companies make more money. They are designed to keep you in debt for a very long time. It’s okay to make minimum payments if you’re doing a debt snowball or debt avalanche, as long as you’re making extra payments toward at least one debt.

• Don’t take on new debt while you’re in debt payoff mode. A funny thing can happen as you watch your debt fall. As your budget becomes more comfortable, you may find yourself feeling flush with cash and tempted to spend. The only way to become debt-free is to avoid taking on new debt. 

• Resist emotional spending. Spending money releases hormones like dopamine that make us feel good. This can become a powerful driver of impulsive emotional purchases. Pause before spending. Create a system where you analyze carefully whether you need anything you’re tempted to buy.  

How to Stay Motivated When Your Goal Is Getting Rid of Debt

Whether it takes you six months or six years to pay off your debt, remaining motivated is key. That’s sometimes easier said than done. Here are our favorite tips. 

• Celebrate small wins. Becoming debt-free is a marathon, not a sprint. Celebrate small wins in a way that's meaningful to you. For example, schedule a game night with friends or family each time your debt is reduced by $500 or $1,000. Celebrating along the way reminds you that you're moving in the right direction. 

• Remind yourself why. When you're tempted to spend more than you should, remind yourself why you're working to become debt-free. You’re working toward a better financial future where creditors don’t already own the money you earn. Less debt means less financial stress. Write down the reasons you want to be debt-free, and keep that list handy so it stays at the front of your mind. 

• Check your progress. Few things are more encouraging than watching debt drop. Keep your eye on how you're doing when you need a shot of motivation. 

• If you fall, get up. Put a post-it note on the mirror that says “I’m human.” If you spend money and later regret it, it’s okay. It’s part of the process, in fact. Learn from the experience, and adjust your strategy going forward. It takes time to learn a new approach to money. Don’t let setbacks keep you from trying again.

• Practice self-care in other areas of life. Becoming debt-free shouldn't be all-encompassing in your life. After all, where's the fun in that? As you work on reducing debt, pick another self-growth goal to work on. For example, you might learn to play the guitar, speak a foreign language, hike new trails near your home, or train your puppy. Give yourself something to look forward to that takes your mind off the business of debt. 

What to Do When You Need Help

If you find yourself feeling overwhelmed by debt more often than you'd like, you don't have to go it alone. Reach out to a trained Debt Consultant who can walk you through your options. If you can’t afford to keep up with even your highest priority debts, you might be a candidate for debt settlement. Freedom Debt Relief has been helping everyday people get rid of debt since 2002. 

Debt doesn't last forever. It may feel like it sometimes, but it's simply not true. If you're ready to make debt part of your past, it's absolutely doable.