How to Overcome Debt with Budgeting

August 20, 2013

By Benjamin Feldman, Finance Writer for ReadyForZero

Debt is one of the hardest challenges to face in life because it can really overwhelm you - mentally, financially, and emotionally. Whether you have credit card debt, student loan debt, or any other type of debt, it is not easy to dig yourself out. But it’s possible. And in fact, I’m sure you can do it with one little tool you’ve probably heard of... it’s called a budget.

Now, maybe you think a budget sounds too old fashioned. If so, try thinking of this as a spending plan, because that’s what it is - it is your plan for how you will spend your money each month.

Why Your Budget Is the Key to Your Future Freedom

Let me make the case for starting a budget if you don’t have one already. And let me make it personal. When I was in my late 20’s and had gotten a job with a livable wage, I took a casual attitude toward my finances. I figure, “I’ve got enough money coming in to pay my expenses, so why bother tracking it?”

Unfortunately, after a couple years of living this way I realized that I was spending significantly more than I needed to. By failing to track where the money was going, I was letting it slip through the cracks in a multitude of ways each month. I would buy a subscription to a magazine or something and forget I had purchased it until the magazine arrived in the mail. 

The problem was that I eventually had to leave that job and once I did I needed a financial cushion to fall back on. Without a large savings account, I started putting expenses on my credit card while I looked for new jobs, and after a few months I had a balance of several thousand dollars on my card. Fortunately, I got a new job and was able to pay off my debt -- after learning to budget! But my transition from job to job would have been so much easier if only I had learned to budget earlier.

How to Develop a Budget That Works

If you’re in debt right now (or trying to stay out of debt) it’s time to get serious about budgeting. Start by looking over your expenses for the previous month. If you use a credit card or debit card for purchases, all your purchases should be listed on your bill or in your online account history.

Go through and add up how much you spent in each category, like this:

Rent:  $950
Household bills (electricity, phone, heating, cable, internet, etc.):  $125
Groceries:  $300
Insurance:  $150
Entertainment:  $100
Credit card payment: $85

You can add whatever categories you want, but try to keep the list relatively streamlined. Once you have your list, add up all your expenses so you know what you spent last month. For example, the total for the sample budget above would be $1,710.

This is the first draft of your budget - congratulations! Now you need to readjust your categories for next month to start accomplishing your financial goals.

The Necessity of Adjusting Your Budget

Why is it important to adjust your budget each month? Well, because you want to make sure you’re in charge and in control. Let’s use the sample budget above again. The credit card payment is listed at $85 but that is just the minimum payment. What if this person wants to pay off the card? And what if they believe they can save more money on groceries? If that’s the case, then maybe their budget for next month looks something like this:

Rent:  $950
Household bills (electricity, phone, heating, cable, internet, etc.):  $125
Groceries:  $200
Insurance:  $150
Entertainment:  $100
Credit card payment: $185

Wow! Now they are adding $100 extra to their credit card payment next month! That means they will be speeding up their debt repayment quite a bit. Of course, being successful at it means actually sticking with your budget, which is often the most difficult part of budgeting. Stay tuned next month for a follow-up to this post in which I’ll explain how to stick with your budget for the long run.

Benjamin Feldman is a personal finance writer for ReadyForZero, a site that helps people pay off debt by showing them a visual plan and a graph of their debt and interest. You can read more of his work at the ReadyForZero blog.


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