At a Glance

No matter your income, paying off debt requires work. And yes, getting debt-free on a budget may mean more planning, but it’s not impossible. By setting goals and sticking with them, you can pay down loans sooner than you think.

10 steps to paying off debt:

  1. Start an emergency fund
  2. Know how much debt you have
  3. Set up a budget
  4. Cut spending
  5. Pay your smallest debts
  6. Pay your highest-interest debts
  7. Explore consolidation options
  8. Look into refinancing
  9. Increase your income
  10. Stay on track

Step 1: Start an Emergency Fund

It may seem backward that the first step of paying off debt is saving for an emergency. For a lot of consumers, though, debt starts with an unexpected bill or job loss. By paying a surprise vet bill with a credit card instead of cash, we start a cycle of debt that can get out of hand.

Most experts recommend having savings for 3-6 months of expenses. If that amount seems steep, start with $1,000. As you cut your debt, you will have more money to set aside. Be sure to include a line item for emergency savings in your budget planning below.

To kickstart your emergency fund:

  • Split your direct deposit: Some direct deposit programs let you channel your paycheck into two accounts. Set aside some for your emergency fund.
  • Use automatic transfer of funds: Schedule small transfers from checking into savings every month.
  • Use a high-yield savings account: This account offers a higher annual percentage yield (APY) than other types of bank accounts. They usually have no minimum balance requirements and free checking.

Step 2: Know How Much Debt You Have

To pay off debt, you need to know how much you owe. Get your credit report and credit scores, as well as your most recent credit card and loan statements. Use the credit report to verify your recorded debts are accurate. Your credit score will help determine if you qualify for lower interest rates or a debt consolidation loan.

Tip: Look for a free app that lets you link multiple accounts to view your debt. You can also put the info into a spreadsheet.

Step 3: Set Up A Budget

When paying down debt on a budget, it’s important to know how much money is coming in and where it all goes. Tracking helps you understand your spending habits and divert funds to paying off debt.

Track What You Spend

Download a free budget template from the FTC or start your own spreadsheet. Create columns for essential spending categories: housing, food, transportation, health, personal and family, finance, and other. Over a month, write down your income and track every purchase.

At the end of the month, compare what you make to what you spend. If you’re coming out positive at the end of the month, great! You can start using that money to pay off debt (or add to emergency savings, if needed). If you want to pay off debt faster–or you’re spending more than you make–you’ll need to change your spending habits.

Step 4: Cut Spending

Find all the expenses, big and small, where you can cut back and divert money toward paying debt. For example:

  • Reduce daily, non-essential purchases. Coffee, eating out at lunch, or paying for parking a few times may not cost much, but everyday habits can add up.
  • Switch up where and how you shop.Visit different grocery stores to compare prices. Look for sales, cut coupons, and join free reward clubs.
  • Suspend subscriptions. Temporarily stop cable or other streaming services-the savings add up fast. Check bank statements to make sure you aren’t charged for services you no longer use.
  • Split the cost of your rent or mortgage. If you have a spare room, add a roommate or host a short-term rental.
  • Think outside of the box. Host a potluck dinner party instead of going out. Go camping instead of going to the movies. Shop second-hand for essentials and go to libraries for books and movies.

After finding all the excess spending, revise your budget spreadsheet. Plug in concrete numbers for the next month, including line items for debt, and stick to them.

Step 5: Pay Your Smallest Debts

We recommend starting with your smallest debts first. This approach is the “debt snowball method.” As you pay off each small bill, you’re freeing money that can be “snowballed” into paying the next smallest debt. This approach may not reduce the amount you pay in interest, but paying off small debts can motivate you to keep going.

The snowball method works like this:

  1. Make minimum payments on all debts, except the one with the smallest balance.
  2. Pay as much toward the debt with the smallest balance as your monthly budget allows.
  3. After you’ve paid off this debt, move on to the next lowest balance.
  4. Repeat until all smaller debts are paid.

Step 6: Pay Your Highest Interest Debts

As you turn toward bigger balances, you’re going to switch approaches. Instead of paying your smallest debts, attack those with the highest interest rates. This is called the debt avalanche method.

The avalanche method works like this:

  1. Make minimum payments on all debts, except the one with the highest interest rate.
  2. Pay as much toward the debt with the highest interest rate as your monthly budget allows. (If multiple debts have the same rate, order them according to the highest balance.)
  3. After you’ve paid off this debt, move on to the next highest interest rate.
  4. Repeat until all larger debts are paid.

It may feel like you’re not making much progress with this method, which can sap your motivation. Trust the method and only look at your balance every few months to check your progress. Stay focused on your goal.

Step 7: Explore Consolidation Options

When you consolidate debt, you’re rolling multiple debts into one monthly payment. With careful planning, this could save you money. Here are a few ways to consolidate:

  • A balance transfer credit card: Requires good to excellent credit to get a low enough interest rate to offset the upfront fee.
  • A personal loan: Each lender has different eligibility requirements, but better credit will land you a lower APR.
  • Student loan consolidation: Combines multiple student loans into one with a fixed interest rate based on the average rate of your existing loans.
  • A debt management plan: This method requires reaching out to a credit counseling agency. A DMP consolidates payments, extends payoff timelines, and can cut interest rates in half.

Step 8: Look Into Refinancing

Another way to pay off debt when you’re on a budget is to explore refinancing your loans. When you refinance, you’re having another company pay off your loan. They then offer you a new loan, hopefully at a lower interest rate. You can refinance student loans, car loans, and home loans.

In the best-case scenario, refinancing can save you money over the life of your loan. You can lower your interest rate, payment amounts, and adjust your repayment terms. Be sure to do the math, though. Refinancing involves a lot of fees and paperwork. You may end up shuffling your debt around-or paying more in fees than the cost of maintaining your original loan.

Step 9: Increase Your Income

Boosting your earnings isn’t easy, but it’s possible. Consider picking up extra hours at work, asking for a raise, or starting a side gig.

You might also consider selling items you no longer use-or gifts you’ve never opened. You can sell items online or through a local thrift store or consignment shop. Be sure to apply any of this extra money toward your debt.

Step 10: Stay on track

The most important part of paying off debt, even on a budget, is staying motivated. Getting debt-free is a marathon, not a sprint. Don’t burn out before the finish line.

  • Stick to your goals and don’t take on new debt: Commit to living within your means until your debt is paid off.
  • Give yourself an allowance: Set aside a monthly amount that you can spend however you wish, guilt-free.
  • Celebrate debt payoff goals: Choose milestones, something enjoyable (and financially reasonable) to celebrate each one, and write them down, so you can look forward to them.