Editorial Policy

Should I Include Debt Payments in my Budget?

Erica Sandberg

July 24, 2013

QDear Erica,

I know a lot of people in debt, and I was in it for a long time. I'm getting myself healthy thanks to people like you. The reason I am writing now is because I have come across some budget pie charts. I want to be smart about where I spend my money, but I noticed that these charts often have “slices” for debt. Have you ever developed a pie chart, and if so, how much should the debt slice be? — Kate

AHi Kate,

Mmm pie! My favorite is cherry, but a good budget can be almost as delicious.

Many people — including me — find visualizing their budgets to be far more eye-opening than simply listing spending categories. When you draw a circle and then section it out to include general areas of spending, it's easy to see exactly where the cash that you have coming in is going out. Such clarity can lead to thoughtful and productive adjustments. So yes, I've developed and used pie charts to visualize my spending.Ask Erica

If you want to create your own budget pie chart from scratch, and are already using Excel to track your spending, you can easily convert your data into a pie chart (and various other types of charts). Budgeting software such as Mint.com will also turn your spending history into charts that show you where your money is going.

If you'd like to figure out where your money should be going, you can find pre-filled charts, such as this one from Oprah.com. What it presents as healthy slices are not unlike the majority of those published by personal finance gurus and credit counseling organizations.

As you've noticed, debt is often included as a category of spending. Fifteen percent is a common figure, and it's usually referring to the amount you might be paying for student loans, personal loans and credit card balances.

So should you have a slice ascribed for debt? It really depends on whether you are in the debt-deletion process and trying hard to get out of it for good. In that case, yes, it makes sense to portion off your pie to include a fixed sum for past obligations. Assuming you aren't charging or borrowing any more, you will eventuality eliminate the need for that slice altogether. It will naturally fizzle away when you're in the clear.

Now, 15 percent of your income for consumer debt is a fine start, but if you can commit to more by shaving off from nonessential expenses, that's even better. For example, reducing dining out or trips to the hair salon can thin some slices, enabling you to redirect that cash to the debt slice. The more one can send to high interest balances on a fixed basis, the better.

On the other hand, if the debt slice exists because a person overspends and accepts living beyond their means as a permanent reality, that's not a good reason to create the category. Do that and you get a terribly unhealthy pie. You'll never pay the balances off and always pay too much in finance charges. Additionally, whatever is set aside for those continuing obligations could (and should) be going toward more important slices, such as housing, transportation and savings.

Got a question for Erica? Send her an email.