Overwhelming debt can take a toll on both your finances and health, and can cripple your life. By adding to your already increasing debt you will be increasing the possibility of declaring bankruptcy and further damaging your credit score. Once you get sucked into the hole of debt, it can be very difficult to dig yourself out of the red and back into the black. To avoid such frightful circumstances, it is advisable to establish an efficient and disciplined personal budget. With a well-planned budget, you can pay off your debt and at the same time secure your financial future.
Creating a budget requires sensible thinking and realistic goals. It also requires making reasonable commitments. For example, if you calculate your income and expenses inaccurately while setting up a budget plan, the budget may become unusable. So follow these few simple guidelines to help you create a pristine budget plan.
Accumulate your financial information:
Start creating your budget by gathering information about your current finances, including the outstanding balance of your current debt, as well as your sources of income and expenses. It should also include the interest rate associates with each of your debt and the name of the creditors. Draw three columns, one for debt, one for liabilities and one for income. Doing this will help you accumulate all your receipts and pay stubs of the prior month. However, the best way to draw chart is on computer – use a pie chart or a graph to make entries of your income and expenses so you can clearly see where your money is going. Make sure your graph or chart indicates your actual expenditures and not debt payments that you have been making over the last few months. Try to be as accurate as possible when gathering and graphing this information – you want to know exactly what you are spending your money on to see the best way to move forward. By giving an approximation of “fudging” the details, you may get an inaccurate status of your finances. For more information on how much you spending on rent, food etc.
Debts and charges:
We usually create a budget in order to determine how much money is left over to pay down the debt after meeting liabilities and charges. By the term debt, we usually mean long-term obligations, like for example, a mortgage, car payment and credit cards. Remember, the longer you will continue to ignore your debts, the worse they will get due to additional interest rates and charge-offs. On the other hand, liabilities are referred to financial obligations that may not be due at the time of creating a budget, but are expectable to occur. These include insurance premium, house rent and tuition fees. Liabilities may also include other regular expenses such as groceries, clothing and so on. Unlike debts, some liabilities are fixed cost that cannot be reduced, while others are variable, such as vacation and movies.
After you have all your debts and liabilities properly charted you can begin to get an idea of which debts need to be paid down the most and which parts of your lifestyle can be trimmed down for your budget.
Trimming down your budget:
The two most important strategies to pay down your debt are directing more of your income towards debt repayment and debt restructure since both of these strategies complement each other and help you pay off your debt faster while also saving you money on interest. Making only minimum payments towards credit card debts may get your payments out of the way, but may not necessarily reduce your actual debt amount, so it is essential to make more than minimum monthly payments towards your debts. After you pay your interest rate and fees, whatever other money you put on your debt will go straight to cutting down what you owe.
If you determine that the expenses are more than your income, trim down the expenses and try to pay as much as you can towards your debt. Try to make the section of debt payments grow on your pie chart each time you finish paying something off.
Restructure debt payment terms:
Restructuring debt also helps to reduce the debt. This primarily means combining all your debts into a single monthly payment. Consolidating multiple bills into a single payment not only makes it easier to keep a track on the paperwork but also reduces monthly payments. Many credit cards or debt consolidation services offer a period of 1 year to pay off the consolidated debt during which no interest is charged. But if you cannot qualify for such services, lowering interest rates on debts will enable you to pay off your financial obligations.
For many of us, consolidating debt may not be an option and the success of paying off your debt largely depends on how well you are able to budget. Keep in mind that paying off your debt will not happen overnight; this is a tedious process that will most likely take lots of discipline to stay on track and stick with your budget. As you continue to pay off more and more, be sure to keep track of your progress and constantly update your plan to accommodate any changes and improvements.