How to pay off debt and still live your life

This post helps you set a monthly debt payment you can keep up. You'll also leave room in the plan for spending you enjoy and for surprises. Then you'll decide ahead of time what a bad month does.

It's trickier than it looks. When you're in debt, the instinct is to cut everything except the bills, including the coffee, the movie, and the birthday dinner. A plan that strict can be hard to live in. This post is about a plan you can keep going. It makes no promise about how fast you'll finish.

1. Start from what you actually spend

Pull up last month's statements and sort what you spent into three piles: bills, essentials, and the rest. Bills are the charges that arrive on a schedule, like rent and utilities. Essentials are things like groceries and gas. The rest is everything else. Subtract the first two piles from what came in. The number left over is what your plan has to work with.

Say you have $200 left after bills and essentials. That $200 is what the next steps divide between a debt payment, spending money, and a cushion. Your own number will differ, and it's the one that counts.

A subscription you no longer use might turn up while you sort. Canceling one frees up room in the plan, and How to find hidden subscriptions walks through finding them.

2. Pick a debt payment you can keep up

Choose a payment you could make in a tight month. The biggest payment you could manage for a few weeks is a different number, and it's the harder one to keep going.

One way to check: think of the tightest month of the past year, then ask whether you could have made this payment in it. If the answer is yes, the payment is probably one you can keep up. If it's a maybe, lower it a little. You can raise it later when a month turns out roomier than you expected.

If you want a starting point, try 50/30/20. It's a rule of thumb popularized by Elizabeth Warren and Amelia Warren Tyagi in their 2005 book All Your Worth. It splits after-tax income three ways: about 50 percent for needs, 30 percent for wants, and 20 percent for savings. Treat it as a starting point only. It may not fit your income. Your own numbers from step 1 decide.

3. Set aside spending money on purpose

Give the things you enjoy a small, named amount. A coffee with a friend or a movie then becomes part of the plan, and you already decided on it. It's a line item you chose.

Some research points the same way. A 2008 study by Keinan and Kivetz suggests that people can regret being too strict with themselves. Thinking about that regret can lead them to choose more indulgences. Slack may help too. A 2019 study by Sharif and Shu looked at goals with a few allowed misses built in. People pursuing those goals tended to keep going after a miss more often than people pursuing an equivalent goal with no slack.

Neither study shows that spending on enjoyment helps people pay off debt faster. The idea here is narrower. A plan with planned slack in it may give you fewer reasons to quit, and some room to enjoy yourself along the way.

4. Plan for the exceptions

Birthdays, holidays, a car repair. These are the costs a monthly plan can miss. A 2012 study by Sussman and Alter looked at exceptional purchases such as celebrations and electronics. It suggests that people tend to underestimate their total spending on them, partly because they treat each one as a one-off.

Look at your calendar for the next few months and name the dates you already know about. Then add a small cushion for the surprise you can't name yet. A small cushion can matter. The Federal Reserve's report on household well-being in 2024 found that 13 percent of adults said they would be unable to pay a $400 emergency expense by any means. Once you've named the exceptions you know about, the plan has a place for them.

5. Decide what a bad month does

Say it before it happens: one over-budget month doesn't cancel the plan. Then write down what you'll do next month. Going back to your usual payment and spending amounts is a fine answer. A sentence like this works: "If I go over, next month I return to my usual amounts and keep the same plan." A slip then has an answer waiting.

General goal research helps explain why this step matters. A 2004 study by Soman and Cheema suggests that violating a goal may make later performance worse than it is for people who set no goal. A strict rule that breaks might leave you further behind than no rule would. A plan with slack built in can give you a way back. That fits what Sharif and Shu found, that people with a few allowed misses built in kept going after a miss more often.

When a month goes sideways, you're already following the plan.

6. Notice the wins

Each account you finish is a win. So is each halfway point. Celebrate them! Paying off a card that started the year with a balance is worth a small party of your own, and the spending money from step 3 can cover it.

There's some research behind this one. A 2012 study by Gal and McShane found that the number of accounts a person had closed predicted whether they got out of debt. That held whatever the dollar balance of those accounts. The authors suggest that completing discrete subtasks might motivate people to keep going. That's a reason to keep track of each account you finish. So when a card hits zero, mark it. Nice work!

Where Unspending Spree fits

Link your bank through Plaid with read-only access. We draft a budget from your actual spending, and you adjust until it fits. Bills, Essentials and Joy, with what you spent against each.

We estimate when you could be debt-free from the plan you set, and show how a bigger payment moves the date. That date is an estimate. Calculations are estimates based on your data and current rates. Not financial advice.

Halfway to debt-free, three-quarters, the day you get there: Today notices. Get clarity and a plan, and spend more time on the fun stuff.