How a Budget Can Help You Get Out of Debt
Everyone should have a budget. No matter how much you earn, how much you spend, or whatever financial situation you’re in, it’s definitely a good idea to have a budget. Everyone should have a plan to make sure they don’t spend more than they earn, and this is especially true if you are trying to pay down debt.
Paying off debt is important, especially if you’re carrying a lot of high-interest debt like credit card debt. That’s because, if you’re paying a lot of interest, the longer you take to repay your debt, the more you’ll end up spending. This can be a serious drain on your finances. By paying down your debt as quickly as you can, you’ll save money and you’ll also reduce your stress level. Having a lot of debt is certainly stressful.
Here are some tips for how you can create a budget that will help you get out of debt.
Understand Your Debt
You can’t create a plan for paying off debt if you don’t know what you’re dealing with. If you have a lot of debt owed to various creditors, it can be easy to lose track of how much you owe and who you owe it to. It’s understandable that looking at your bills in detail can cause anxiety but understanding them is the only way you’ll be able to create a plan to pay them off.
Figure out how much you owe, when you need to make payments, and how much interest your paying on your debts. This will help you avoid missed payments (which can lead to significant penalties) and help you focus your efforts. Putting the most attention (and the most money) toward the debts with the highest interest rates, for example, can help you save money over time.
Know What You Earn
Just like you have to know how much you owe, you also need to determine exactly what you earn. For some people, this will be pretty straightforward. If you earn the same amount of money every month, use this amount in your budget. If you do shift work, contract work, freelance work, or work different hours every week, you’ll need to determine the average amount you make each month.
Only include income you can count on receiving each month. Don’t count bonuses, tips, or any other money that you don’t receive regularly.
Track Your Spending
The third step of creating a budget is to know how much you spend. If you’ve been tracking your spending, look at your records to see what you spend every month and where this money goes. If you haven’t been tracking, you can get a lot of information from looking at old credit card and bank statements.
You don’t just need to know how much you spend each month, but also where you spend your money. Create categories and break down your spending into different areas, such as groceries, eating out, transportation, clothing, entertainment, etc. Don’t forget to include debt repayment as a category as well as emergency savings.
Then you’ll need to make sure you can fit all of your spending into your budget. The goal is spend less every month than you earn. You’ll also need to plan to pay for as many purchases as possible with money you already have, not by using credit cards. You don’t want to add on more debt to the debt you already have.
Cut What’s Necessary
If you have debt to repay, this should be one of your top priorities. Putting as much as you can towards your debt will help you pay it down more quickly and save you money. As mentioned, it’s often a good idea to focus on the debt that costs you the most money. This is typically the debt that charges the highest interest rate.
Look at your budget and see where you can make cuts. Whatever you can cut from your other expenses can be put towards debt repayment. There are various ways to reduce spending each month. Some options include cooking at home instead of eating out, walking or taking transit instead of driving, reducing the amount you spend on clothing or entertainment, suspending some of your subscription services, and much more. Each person will have their own unique financial situation, and their own priorities, so you’ll need to look at your spending and see what cuts make sense for you.