I got an interesting tweet from a reader a few weeks ago. He asked me what would be a good percentage of his budget to allocate towards debt repayment. At first I didn’t really understand the question, because I had never thought of my debt as part of my budget. Debt wasn’t like food, or housing. Debt was always this big scary monster that needed to be slain as quickly as possible. I responded to him saying as much, that you should pay as much as you possibly can towards your debt until it’s gone.
Debt Is Not Part of a Balanced Budget
If you google “budget pie chart” and hit images, this is the first thing you’ll see:
It clearly shows debt as part of a balanced budget. I think this sends entirely the wrong message. This pie chart makes it seem like debt is normal, and the truth is, for the vast majority of North Americans, it is. For most people, there will always be debt, whether it’s a car payment, student loans, or a mortgage, debt is constant.
But it shouldn’t be.
While you are paying off your debt, it shouldn’t be a constant, it should be a huge looming force. It should govern your every purchase and permeate your every thought. Debt should be a big part of your life, while you are paying it off.
You Don’t Need To Be in Debt Forever
When I was paying off my debt, I frequently paid over 50% of my income towards my loans. Just check any random net worth update from my debt-laden days and you’ll see numbers like $1,000, $1,300, and $1,500, this is how much I was paying towards my debt every month. A lot more than 15%.
If I’d only paid 15% towards my debt, as this pie chart suggests, I’d still be up to my eyeballs in debt. I wouldn’t have a $10,000 emergency fund, and I definitely wouldn’t be planning a trip to Paris. Maybe I could’ve used the extra money to build up a small emergency fund, or take a few small trips, but I can’t say for certain that would’ve happened. What I do know is that if I’d only paid 15% of my budget towards debt, my debt would have been a normalized part of my existence, and most importantly, it would’ve ended up costing me a lot more in interest charges.
My point is, there shouldn’t be a rule of thumb for how much of your budget you should allocate to debt. You should pay as much as you can afford toward it until it’s gone. After that, adjust your budget and enjoy the fact that you’ll be able to comfortably save a lot more than the measly 10% that is suggested in the pie chart above.
Debt is a ball and chain, whether it’s nasty credit card debt, or socially acceptable student loans, it’s all the same. It shouldn’t be managed, it should be eradicated. Get rid of your debt as fast as you can. Then build up your savings, and enjoy the freedom that comes with being debt free. (Trust me, it’s awesome).