How much of your paycheck should go toward credit card debt?

Quick insights

• The 50/30/20 budget rule provides a guideline for how much of your income to allocate toward needs, wants, savings and debt repayment while working to clear credit card debt.
• Categorizing recent spending can help you find areas that can be reduced to prioritize debt repayment.
• Consider the debt avalanche or snowball methods to help tackle debt, in addition to reaching out to your creditor(s) for potential adjustments on your account.

Carrying debt from month to month can be a financial drain that distracts you from other priorities. If you have debt, you probably know that you should be devoting a fair amount of your paycheck to resolving it. But how much of your paycheck do you need to send toward debt, keeping other essentials in mind? In this article, we’ll walk you through the process of reviewing your budget and suggest strategies for tackling credit card debt.

Overview: Tackling your debt

Anyone can accumulate debt, and it may be the case that two individuals with debt can have widely different financial circumstances. For this reason, the strategies that work best for one person may not work well for another. Thoroughly reviewing your finances can help give you an idea of how aggressive you may want to be toward your goal of repaying debt.

Common strategies

Wondering what methods and tips might work for your debt situation? Here are a few strategies or tips:

• The debt avalanche method: The debt avalanche method focuses on paying off debt in order of greatest interest rate to the lowest, reducing the amount of interest you pay overall.
• The debt snowball method: This debt snowball method focuses on paying off the smallest debt first (in terms of remaining balance) for wins that give you momentum.
• Negotiate with your lender: You may be able to secure a lower interest rate or balance reduction by reaching out to your card issuer directly to explain your situation. Those with high credit scores or continuous payment history may be more likely to succeed with this tactic.
• Automatic payments: If you don’t already have automatic payments set up for your accounts, this can be a helpful step so payments aren’t missed as you work to reduce your debt.
• Make more than the minimum payment: Where possible, making payments that are larger than the required minimum can help you gain ground and repay your debt faster (and potentially with less interest).

Regardless of the debt repayment method you choose, do your best to make your minimum monthly payments to avoid potential fees and penalties.

The 50/30/20 budgeting rule

A common method for managing debt is to adjust your budget to follow a 50/30/20 ratio, with 50% of your income going toward needs, 30% for wants and 20% for savings and debt repayment. While this exact ratio may not work for every financial situation, it can offer a guide as you determine your strategy. To begin, you’ll need to calculate your total monthly income, including money earned from freelance work or side hustles and marital or child support (if applicable). Then, determine the total cash amount for 50%, 30% and 20% of your income:

• Needs budget: Total income x 0.50
• Wants budget: Total income x 0.30
• Savings and debt: Total income x 0.20

Following the 50/30/20 rule, someone with a total monthly income of $5,000 will have $2,500 for needs, $1,300 for wants and $1,000 for savings and debt repayment.

Total your monthly expenses

To see how closely you already align with the 50/30/20 ratio, you’ll need to categorize real expenses from your recent bank and credit card statements. Using a spreadsheet or pen and paper, identify the totals for the following categories:

1. Needs: Total the essentials needed to maintain your health and home life; these are your “needs.” Include your monthly rent or mortgage and the typical cost of utilities, groceries and insurance premiums.
2. Wants: Next, estimate the amount you typically spend on entertainment, hobbies, nights out and other “nice-to-have" non-essentials. When it comes to reducing expenses for debt repayment, this is typically the area people look at first.
3. Savings and debt: This category contains the part of your budget devoted to paying down debt and creating a reserve. How much are you currently spending on your credit card debt(s) each month? List monthly totals and the total balance for each card and account in your notes (you may need this later). If you habitually save or tend to have cash leftovers at the end of the month, jot down this average as well. 

How close is your existing budget to abiding by the 50/30/20 rule? Are there areas which could be reduced to prioritize debt repayment or savings? In the next section, we’ll describe how to prepare for unexpected expenses while managing debt.

Preparing for other expenses

Growing savings and debt repayment are sometimes interrelated goals. Without flexibility in your budget or an emergency fund, unexpected expenses in life may pressure you to add to your debt as you try to reduce it. This is one of the reasons why some people choose to prioritize building savings before aggressively tackling their debt. Creating an emergency fund could involve anything from setting aside a few hundred dollars in a separate account to accumulating as many months of expenses as you’re able to.

In summary

If you’re carrying a substantial credit card balance from month to month, it can be helpful to examine your budget and begin making a plan for repayment. While there’s no singular answer to how much of your paycheck should go toward your credit card debt, examining your budget carefully can help you identify adjustments that can begin taking things in the right direction. For more ways to think about expenses in your budget, check out our articles on fixed vs. variable expenses and zero-based budgeting.