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YNAB Guides

Deal With Your Debt

How Debt Gets in the Way of Your Priorities (You Already Know How).

If you’re like a lot of folks, it was your debt that finally made you realize you really need a budget.

Your debt made you feel like you needed a budget. The restriction of that debt every time you went to make a purchase, the fear of that debt every time you were faced with a credit card statement, or the way the debt was limiting your future options.

It’s not important how you got here. It’s important that you turn things around – and your budget is going to do that for you. An effective budget will align your spending decisions with your goals and priorities. You’ll move forward. It is all about moving forward.

You can feel your debt. But let’s be clear: carrying debt blocks you from moving forward because it prevents you from prioritizing all your dollars towards your future goals.

The money you pay toward debt is going toward things that have already happened. Because when you have debt, you have debt payments. And when you have debt, chances are, you have a cash flow problem.

When you get paid, too much of your money is already spoken for. And it isn’t spoken for in a this-is-going-to-buy-me-awesome-new-shiny-things-or-help-me-achieve-my-dream-of-a-college-education kind of way. It’s spoken for, as in, it’s gone. You have to use it to pay for things you already did, whether those things were just for fun or were emergencies you had no other way to deal with.

As you budget, you’ll learn to make better and better decisions. And we want you to make decisions about all of your dollars. Which means dealing with your debt. Until it’s gone.

Stop Going Backwards, Part I: Question Your Spending.

You want your debt gone. Preferably soon. Like yesterday. Before you can deal with your debt though, you’ve got to stop going backward.

You got into debt because, at some point (and perhaps at a lot of points), you spent more than you earned. This puts your budget, your priorities, and your sanity at risk.

It’s time to question your spending.

To a lot of people, this sounds like their worst fears about budgeting come true. No more spending? No more fun? It sounds highly restrictive. But when we talk about questioning your spending, we don’t mean stop spending. We mean question your assumptions about your spending.

Is it aligned with your priorities?

So much of spending and money management in general comes down to habits. You buy certain things and spend money on certain activities out of habit. It’s the way you have always done it. If asked, you might say you need to.

But habits don’t necessarily reflect current reality. In fact, they restrict your spending just like debt does. If you spend out of habit, you’re not making a choice. Habits may or may not be aligned with your priorities. That spending may not even bring you any joy. But add all those habits up, and you may not have much money left to work with.

Some might tell you that you can find success in a series of tips or tricks. But really, it’s found in two simple steps.

Give every dollar – and only the dollars you have – a job. This will ensure that you’re spending less than you earn. You’ll stop going backward.

Then question and change the habits that would have you deviate from this plan. Much of your spending may survive the process. Some won’t – but you likely won’t even miss that habit-based spending. You’ll find that stopping that spending isn’t restrictive. It will allow you to have more money to spend on things that improve your quality of life. It’s empowering.

Stop Going Backwards, Part II: Embrace Your True Expenses.

The other way to prevent going backwards on your debt is to make sure you’re expecting the unexpected, and so never leave yourself too close to the edge.

Here’s what we mean. You might be tempted to deal with your debt by throwing every possible dollar at it – it might feel good, right? Except you leave yourself stretched so thin that you have no cushion. When something unexpected happens (and it will), you have left yourself no choice but to reach for a credit card. Again. And there it is. You’re going backwards.

Enter Rule Two, Embrace Your True Expenses.

As a part of your giving every dollar a job, make sure that you are setting money aside for your non-monthly expenses. Are you preparing for next semester’s books? Are you ready for next winter’s heating bills? Are you setting money aside for an inevitable car repair?

Maybe you built up your debt in the past because of “unexpected” expenses like these. “How could I see it coming?” you thought. The truth is, most of the “unexpected” expenses in your life can be anticipated. You don’t know exactly when they will come or how much they will cost, but come they will!

So before you begin channeling every dollar toward your debt, make sure you’ve taken a good look at what’s coming down the road. What expenses are likely to come up? Take care of your obligations, then budget for your true expenses, especially things like car repairs, home repairs, and medical needs.

Something unanticipated is going to happen. When you have cash ready to deal with it, you won’t need to use a credit card. You’ll keep moving forward. And that will feel amazing.

Lay It All Out.

Have you ever been scared to open your credit card statement? Have you ever convinced yourself that just a little more debt probably won’t matter because it is already so out of control?

Having debt can feel overwhelming, and feeling overwhelmed leads to poor choices. You might be tempted to throw your hands up and just ignore your debt.

Or you may move to the complete other end of the spectrum. You might be so tired of your debt that you attack without a plan, leaving yourself unprepared in other parts of your budget. And without a plan, you could repeat past mistakes.

Neither of these responses works because neither is realistic.

Getting out of debt requires knowing where you stand. You can’t deal with your debt until you’ve laid it all out and gotten to know it. It’s big and hard to face. But once you do, there will be no more worry about what might be lurking ahead. Once you are realistic about the situation, you can also be strategic. You can be completely engaged in creating a plan to eliminate your debt.

For each debt you have, the two most important pieces of information to collect are the outstanding balance and the minimum payment

Looking at all of your debts, what is the combined total of all your minimum payments? This is how much money each month you’re not really making choices about; it is already prioritized for you.

That’s what you’re going to change. You’re going to deal with your debt, shrink that number, and watch the possibilities open up in your financial life. Picking a single debt to focus on will get you started.


Imagine that you’ve moved into a new home. It’s an older home, so there is a lot of work to be done in pretty much every room. But you also have a baby coming in three months, so the nursery is your top priority.

You’ll do the minimum you need to make each of the rooms livable, but as far as decorating and painting, you are focused on the nursery. It doesn’t make sense, for example, to paint one wall in each room, then move on to another wall, and another. You need to get the nursery done as quickly as you can.

Once you do, you also won’t lose time and momentum working from room to room, and you’ll get all the rooms done in less time than you would have working a little bit on each.

It turns out that paying off your debts works the same way.

A mistake that people commonly make when trying to pay off multiple debts is to pay off a little bit extra each month on each debt – to paint a little bit in each room. It feels like doing the right thing.

But it isn’t. If you pay a little bit extra to each of your debts each month, it will take longer to improve your cash flow. You don’t clear any single debt, so you’re stuck committing dollars to all those payments each month.

(Most of the time, it’s also going to mean paying more interest in the long run, which means more cash-flow restrictions. There’s a lot of math involved.)

Your goal, just like painting the nursery, is to eliminate debts completely. One debt at a time.

With that in mind…which room will you paint first?

Outstanding balance is the most important factor in choosing a focus debt, but perhaps not in the way you expect. Emotionally, you may want to attack that one with the highest balance. It gnaws at you the most. But in fact, you should begin with whichever debt has the lowest remaining balance. Remember that the goal is trying to completely eliminate one debt payment, and the one with the lowest remaining balance is closest to being gone. Closest to freeing up dollars in your budget for decision-making.

If you have several debts with similar balances, consider three other factors in choosing which one to focus on:

  • Does one debt have a higher required payment? Dealing with this one will clear up more space in your budget when it is gone.
  • Does one have a significantly higher interest rate? Dealing with this one means paying less in the end.
  • Does one of them have tax-deductible interest (like a student loan)? Dealing with this one later means at least when you’re paying interest, it is benefiting you.

OK, now you’ve picked a debt to focus on. You are going to pay it off. It turns out there’s some strategy involved there, too.


You’ve identified a debt to focus on. But how much should you pay? How long should it take you?

On one hand, the sooner you can wholly eliminate that debt payment, the sooner you’ll improve your cash flow and free up space for decision-making in your budget.

On the other hand, dealing with your debt is a priority in your budgeting, but it isn’t your only priority. And you’ve determined already that you’re not going backwards again.

How do you make sure you take care of all your priorities, keep moving forward, and maximize your debt paydown?

Step 1

As a part of your normal budgeting and prioritization process, assign the minimum payment for each of your debts – these minimum payments are obligations in the truest sense of the word. While you will focus on one, you need to make sure you aren’t creating problems with fees from missed payments on the others.

Step 2

Set a funding target for your focus debt that’s higher than the minimum payment. Remember that this target has to work in the context of all your other priorities. There’s a balance here of budgeting enough to make a real difference, but not being so aggressive that you leave yourself short in other areas.

Step 3

After you have taken care of obligations, saving, and other needs in your budget, assign additional money toward your focus debt, trying to reach your target. If you find it easy to do this, consider raising your target.

Step 4

Review your budget periodically as a part of being actively engaged in paying down this debt. It’s a good time to evaluate whether money you have budgeted to one job might be better served paying down your target debt.

Once you pay off one of your debts, all the money that was going toward that debt is suddenly available to be prioritized. Maybe towards another debt. Or maybe using Rule Two to prepare for the unexpected? Or maybe simply towards something you’ve always wanted to do, but your debt was in the way, even saving up for a celebratory got-out-of-debt trip? It’s up to you. Paying off debts gives you choices.

Want to Go Faster?

We’ve established that it’s not a good idea to use the cash you’ve got set aside for car repairs to pay off debt. You’re going to need that money soon, and you don’t want to be in a position of having to reach for a credit card.

On the other hand, if you have long-term savings that won’t need a job for years, or maybe doesn’t have a specific job yet, you may have some money set aside that you can consider using to deal with your debt.

Would you take a cash advance on your credit card to save money for something years down the road like retirement?  Of course you wouldn’t. There’s no sense in borrowing money at 17 percent or 13 percent in order to put it in a savings account where it will earn less than one percent.

But if you have large sums of money set aside for the long-term future (different than the money you are using to embrace your True Expenses), and you’re carrying credit card debt at the same time, this is essentially what you’re doing.

If you have $2,000 of credit card debt and can pay $150 a month toward it, you’ll be paying that debt for more than a year and pay hundreds of dollars in interest. If you have that money sitting in an account, intended for a new car or maybe even retirement (especially if that retirement is years away), you might consider using that money now to deal with your debt.

This isn’t something to make a habit of. You can’t do this and then go rack up more debt. You just can’t. But you won’t. Because now that you have a budget, you won’t be acquiring new debt. This is not a strategy to allow for over-spending; it is a one-time strategy to get you out of debt completely.

If you do use long-term savings in this way, you can immediately start saving money again for a car or retirement. You’ll free up more dollars in your budget that can truly be prioritized. And if your interest rate is high on that debt, especially in the double digits, you’ll save and earn more money in the long run.

The decision to use long-term savings in this way is a potentially powerful tool, but it depends significantly on considerations particular to your situation. Be sure to consider your own present and future needs and don’t leave yourself with so little cash that you won’t be able to make good decisions, especially in the near- to mid-term.

Should I Keep Using My Credit Cards?

If you’re dealing with your debt, especially with credit card debt, you may wonder, “Should I still use my credit cards?”

Credit cards, after all, are built around debt. You’re borrowing money the moment you use the card, even if you plan to pay off your balance in full.

Can you keep using your credit cards? Sure. Should you?

If you’re questioning your spending and making spending decisions based on your budget, a credit card is just another way to access the money that is already in your budget. You’ll create a little bit of debt when you use your card – but you’ll already have a plan to pay it off. You’ll already have the money to pay it off, right there in your budget.

Problems occur with credit cards when you use them to spend more than you earn, when you use them to borrow from your future self. “Well,” you think, “I’m going to land a big payday in six weeks, so why don’t I just use the card to get this now?” This can be really tempting when your credit card company tells you that you have $10,000 in available credit.

That’s going to get you into trouble. Ignore the available credit; make your spending decisions based on the amounts available in your budget. Just like every other spending decision. Your method of payment shouldn’t change that.

The other beautiful effect of using credit cards this way comes when you make a payment. Because every dollar of spending on your credit card was already in your budget, you can pay the full balance, the all-the-way-down-to-zero balance, at any time. You’re not stressing out waiting for enough money to come in. The money is there, and your stress is gone. Just like your debt.