Does debt pay-down fit into The Ideal Household Budget?

Written by
Damian Dunn

I recently started reading Your Money Life: Your 20s. I read the chapter about your ideal household budget last night and am working to get mine set up. I graduated college last year and have a little bit of debt, nothing too crazy though - around $11,000. I am working to pay this off as soon as I can using the debt momentum method. However, I am curious about how debt pay-off plays into the budget plan you recommend. I have a $1,000 emergency fund set up, but I don't know what category to put debt payoff into. How much of my monthly income should be set aside for things like this? Or should I allocate the funds to different categories based on the category that the loan falls into - like auto, credit card, and so on?

Thanks for the input!


First of all, let me congratulate you on two things: First, your recent(ish) college graduation. Second, your superior taste in books. You’re gonna go far.

When most people set up their personal budget based on our Ideal Budget, they will most likely come to the quick realization that they’ve got spending in categories we didn’t include. College loans, credit card debt, child care, and probably a number of other items that start with the letter “C” are conspicuously culled from our categories. Without thinking a bit outside the box (or pie chart in this case), you’ll get frustrated really quick.

Let’s consider what a budget really is. A budget is nothing more than a plan for your upcoming income and expenditures. Our Ideal Budget is one version of a plan. It’s “ideal” because it includes expense categories that are common, expected, and aren’t going anywhere anytime soon. Why don’t we have a “student loan” category? Not everyone has student loans (believe it or not), and we don’t want you to have them longer than absolutely necessary. The same can be said for child care expenses and other types of consumer debt. You may have them now, but you won’t have them forever. Much like kidney stones, these expense categories are painful, but given time, they’ll pass.

That doesn’t help you answer your question of what to do now, however.

You get to make your own personalized Ideal Budget. You see that picture at the top of this post? The one with the piece of debt trying to slide into the pie? Imagine if that piece were able to make its way into the pie so it was appropriately sized and made the pie bigger by a piece. The pie must still add up to 100%, but now you have another piece that you need to allocate money to. That can mean only one thing… one or more other pieces have to get smaller. In other words, you’re going to have to spend less in other categories. Which category/ies should you spend less in? That’s up to you. Maybe you spend less in the housing category by having a roommate or two. Maybe you up your skills on how to eat for less at home rather than going out as often. Maybe you ditch a cell phone in favor of the original communication device, smoke signals. The point is, when you personalize your budget, you’ve got to account for the changes. Put money where it needs to go and cut back in areas that you’re able to.

If the debt in question is on a car, then it falls into the “Transportation” piece of the pie. You’ll need to set up a new category called “Student Loans” to make sure those are included. If you’ve got some lingering credit card debt, that’ll go into another new category. I think you get the picture. Here’s the good news… Once you get the student loans taken care of you can remove it from your budget and re-allocate those funds to other categories. (I’d suggest putting it towards savings of some sort or further debt repayment. Focus on doing something that will benefit your Power Percentage™.)

How much of your income should you set aside to vanquish your student loans? I think the absolute least amount of money you should put towards your loans is the amount of money it will take per month to pay them off by the time you’re 30 (assuming you’re a traditional graduate, i.e. early 20s). $11,000 really isn’t that big of a number, and you could very well be able to pay it off sooner. However, I also want to encourage you to take full advantage of your employer’s 401(k)/403(b) and their match. Money that you can save now will have a loooong time to grow before you will use it. It’s crucial that you use the advantage your age gives you in this situation.

Whatever categories you use in your personal budget are just that, personal. No two people’s financial lives are the same, so there will always be a component of customization involved. The one thing that does hold true from case to case, individual to individual, and family to family, is that it will take a bit of effort and persistence to create and manage your budget. The rewards you reap from maintaining your budget, however, will be worth it.

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