Create a Budget and Get Out of Debt
A budget is one of the most important and most powerful tools you have to manage your money. Unlike anything else out there, it can give you more control over your money than you think. It can help you to spend less, save more, plan for retirement and even do the things you want to do. It is always a good idea to have a budget in place, even if you do not believe you have the money to manage it.
How to Create a Budget
The first step is creating a budget. You can find a variety of budget help websites to help you to create one. You can also spend a great deal of money on budgeting software, but the fact is, a simple budget on paper does the same job. Here is a look at how to get started.
List all of your income sources and your anticipated paychecks/income for the month
List all of your projected expenses for the month, based on how much you spend last month:
- Mortgage/ rent payment
- Car loan payments
- Phone/cell phone service
- Debts including credit cards, list minimum payments
You also will want to budget for other things that you spend money on that may have flexible monthly payments. This includes:
- Entertainment spending
- Funds for school lunches or work meals
- Funds spent on clothing/household purchases
In addition to this, you can plan to list any tithe that you make, as well as the amount you plan to put into savings. The left over amount you can and should use to pay off your debts.
Tip – If you are unsure of how much you spend each month on discretionary spending, track your spending every single day for a month. Write down everything from that coffee you stop to get in the morning to the money you hand over to your teen. This way, you can really see where your money is going each month.
Use Your Budget to Pay Down Debt
You can use your budget to pay down your debt. Once you place an amount next to each of your expenses, you can subtract that amount from your income. The remaining amount is discretionary spending (you may be able to trim down the costs associated with groceries or other flexible payments as well.) With this amount, consider the following tips.
Paying down debt is often done faster when you can put as much extra money as you can each month towards one debt. There are two options to consider:
- Pay off the debts that have the highest interest rate first – this way, you save the most money because you pay down expensive debt first.
- Pay off the smallest balance first – this can cost more, but it helps you to stay on track because you can see your debts disappearing faster.
In either case, place any extra money you have each month towards that debt until it is paid off. Then, move on to the next debt until all of the debts are paid offer. By paying down debt like this, you can get rid of it quickly and you end up having more money in your pocket.
How to Make it Work
The hardest part of using a budget to pay down your debt is sticking with it. There is no doubt that some people may struggle to find the right solution for their needs. How can you live on a budget? It is just too hard. Here are some tips to help you to succeed.
- Make a realistic budget. It should include everything you spend money on, including the entertainment expenses that you have. If you limit yourself too much, you could end up falling off the budget plan. You can give yourself spending money, just keep it low.
- You do have to stop using credit. While using credit wisely is a good idea, those who have a lot of debt should create a budget based on cash only. That way, you do not worsen your situation over the length of your life. Get out of debt then come back and use credit wisely if you need to boost your credit score.
- Ensure that the budget is something everyone in the family is aware of. It should be a family commitment to ensure that everyone is on the same page. That way, the teens know why you cannot give them spending money and even younger kids are learning the importance of budgeting.
- Adjust your budget when you need to do so. If your expenses change, change your budget to reflect this. It will help you to pay off your debt sooner if you can make adjustments to keep you on track.
- Do establish an emergency account. Use it for just emergencies. For example, you may not have a budget plan for that broken down vehicle. It hurts getting that bill but when you have a fund set up to handle these expenses, you are less likely to break from your budget and more able to stay away from credit cards.
For many individuals, the word budget seems like a bad word. After all, it takes hard work to make it happen. However, it can be a great way to get you back on track and to help you to have more money in your pocket to use. By knowing where you should be spending money, you reduce the chance of having to miss a payment or finding out that you have to turn to a credit card to buy groceries for the month. Most importantly, you know where your money is going each and every month. That way, you can make better decisions every time you open up your wallet. It can be empowering to know where you stand as well as where you are going with your financial future.