I don’t remember learning much about budgets in school. So it wasn’t until my mid-20’s that I started to try and make sense of it on my own. By that time I was already in lots of debt. Lots of the financial advice I was reading talked about how I needed to budget my money. It didn’t make a lot of sense to me; after all, I didn’t see how I would be able to make my expenses less than my income, let alone pay off tens of thousands in debt. The more I learned, the more I understood how budgeting can keep you debt-free.
Once I decided to get a handle on my finances, the last thing I wanted to see was lots of debt. It felt like a constant reminder of where I was and what I used to value. Instead, I longed to have a positive focus of being in control of my money – not the other way around.
A budget is a written plan of what you expect your income and expenses to be for the year. Budgeting typically gets a groan out of people because it requires that they think about their financial situation and plan it out. For some people, this can be depressing. Trust me, ignoring your money doesn’t fix the problem. Setting a budget for yourself will help you identify the problems in your financial life and set a plan to fix them.
Your goal is to be debt-free. You can start by creating an annual budget.
There are lots of formats for budget planners from apps on your phone, spreadsheets on your computer, and my favorite pen and paper, like my budget planners. I think the act of writing the information down helps make it more real to me, especially as I am trying to get a handle on my fiances. Plus, there is a pocket for all my bills to be paid and my receipts, so everything is together in one space.
Income is essentially money that is coming into your bank account from work or investments. What were your sources of income for the year? If you receive bonuses or commissions, this part may be difficult, but make a best guess effort. Enter them into the month they are expected to be paid to you.
Expenses are money flowing out of your checking account or credit card each month. For most people, this step will take a bit more work. While this might take a little effort the first time, in subsequent years it gets much easier. It may be easier to use budget categories and group certain expenses together.
Take the income and then subtract the expenses, the result is the net savings. Are you making more money than you expect to spend? Are you ending up with less than you earn? Now is the time to make adjustments.
If you are making more than you spend each year, then add additional money to your savings in your budget, or use it to pay down debt. There are ways to spend less, if you are spending more than you earn, then you should find ways to spend less. If you budget correctly, your net savings should be close to zero because everything is assigned to a category.
The goal of the budget is to balance out your income and expenses with a net savings of zero.
This does not mean that you should spend as much as you earn. It means that all your income is accounted for in some way. If you have extra income, then it should go to savings. If you have a deficit of money at the end of the month, then you should either find ways to earn more money or reduce spending on certain discretionary items.
Maybe this means to reduce the number of nights you eat out, or reduce the number of cups of coffee you buy at coffee shops, or maybe you can reduce your spending at holiday parties with friends. There are many fun and some less fun ways to reduce your spending. If you really want to be debt-free, you will find a way to balance your budget.
If you have debt, your goal should be working to pay it off as quickly as possible. The interest you are paying on your debt is amounting to a small fortune.
Go back and review how important each item is in your budget. Look for any place you might be able to pull from and put towards your debt payoff. If you have money allocated towards saving for retirement or your children’s college fund, you should ask yourself, what is more important in the short term? Can your retirement or college savings plan survive a month with a smaller amount or no contributions?
There is no correct answer to this. You would have to prioritize your short-term and long-term goals to determine what is more important. If you cannot find extra funds to make your budget debt-free, then you will have to find other places to pay for the extra expenses. This may mean include getting a second job or a side job for this period of time.
What Is The Fastest Way to Budget to Get Out of Debt?
Whichever way you choose to create a debt payoff plan as long as you are consistent is the one that works best. Popular methods for debt payoff are the debt snowball and the highest-interest first methods, but I tested these in different scenarios and found that each were effective.
The main thing you will want to remember is that paying off your debt IS a priority and you should make an effort to pay it down as quickly as possible. You may consider credit card consolidation as well although there are pros and cons to this.