Q: I’m having a hard time paying down my debts and staying within my budget. I pay extra on my debts each month, but I keep turning to my line of credit to deal with things like car repairs and insurance. I’m not getting ahead, so what am I doing wrong?

A: As hard as it might be to believe, paying all of the money you have each month towards your debts, will not help you pay debt off sooner. It might actually keep you in debt longer.

Savings is the Secret Weapon Against Debt

The real secret to paying down your debt is to establish a realistic budget for your regular monthly expenses, and then incorporate a set amount, which you set aside in savings, for the expenses that only happen periodically.

Over the course of a year, expenses like car and house maintenance, insurance, as well as unexpected financial emergencies, can add up to a lot of money. If you don’t set savings aside from your paycheques to pay for these expenses, you will likely keep using your credit line to deal with them.

Steps to Take for Debt Repayment

To manage all of your expenses while paying down debt, follow these steps:

Determine Annual Expense Amounts

Look back at account statements and your calendar from the last year or two. Estimate how much you will need this year to cover all of your annual expenses. If you’re not sure which annual expenses to include, take a look at pages 4 and 5 of our budgeting workbook. Items marked with a star (asterisk) are annual, or seasonal, expenses that many people typically forget to account for. Simply put, these are the expenses that end up on credit cards and which wreak havoc on budgets.

Whatever total you come up with for the year for your annual expenses, divide this number by the number of paycheques you will receive this year. For example, if you’re paid bi-weekly, divide by 26. This is the amount you will need to set aside from each paycheque.

Create a Realistic Spending Plan

Paying off debt and setting savings aside is much easier to do if you have a realistic spending plan. A realistic budget will guide your spending decisions, ensure that you don’t have more month than money and help you stick with your plan.

Related: 7 Steps to Build a Household Budget

Include Annual Expense Amounts in Your Budget

Reduce your monthly spending so that you can include what you need for your annual expenses in your monthly budget. Start calculating your new budget by using the minimum payments required for debt repayment. Once you know that your budget is realistic, use an effective strategy to get out of debt faster.

Set Savings Aside in a Separate Account

Set up a separate savings account with automatic transfers on pay day. Having a separate account will help you manage your annual expenses more effectively. Once your savings account has a bit of a balance, start looking for a certified financial planner to help you invest and plan for the future.

Keep an Up To Date List of What You Save & Spend

Create a ledger or spreadsheet for each annual/periodic expense category. Keep a running tally as you withdraw funds from your savings account to pay for annual expenses.

If you spend more in one category, e.g. car repairs, you will need to adjust your spending in other categories to stay within your budget. To see what a running tally of seasonal expenses might look like, check out pages 14-15 of our completed sample expense tracker.

A Balanced Approach to Spending & Saving will Get You Ahead

Learning to manage annual expenses takes a little patience, compromise and discipline. While living within a budget might be a bit of an adjustment to start with, you’ll quickly see that taking a balanced approach to dealing with your debts gets you the results you want.

As the balance in your savings account starts to grow, you’ll also see the balances on what you owe go down. And what could be better than that!

Related article: How Much Money Should You Spend on Living Expenses – Budgeting Guidelines for After-Tax Income