Establishing a realistic budget which allows you to meet your obligations and to save for future expenses is the only way to manage your debt.
How Much Debt Do You Really Have?
Managing your debt can only begin with an honest picture of the debt obligations you have and an accurate accounting of the expenditures you make every month, down to the penny. Unfortunately, most people do not complete this first step and, without it, debt continues to accumulate until they are in “over their heads.” It is imperative that one month is spent recording all expenditures, so that a budget can be developed which is realistic and so that non-essentials may be eliminated if necessary. Budget basics will help you stay on track.
Once the expenditures have been recorded, it will be necessary to place them in columns, each labeled with an appropriate title. The first column should be titled “Necessities.” These include mortgage or rent, groceries, gas, utilities, recurring medical costs, personal hygiene items and insurance. The second column should be titled “Credit Payments.” These include car, loans, credit card and other revolving payments that you must make each month. The third column should be titled “Non-recurring Expenses” and includes items such as a dental and/or doctor bills – those items that do not necessarily occur each month but do come up at times. The fourth column will be titled “Non-Essentials.” This is where you place all expenditures that are not necessary for your life but on which you rather consistently spend money. Such items might include meals eaten out, morning lattes on the way to work, movies and other entertainment, clothing and shoes you do not have to have, impulse purchase items, etc.
Once you add up each column, you will be able to see how much of your income goes for necessities, how much for debt and how much for unnecessary items and services. At this point, you are ready to manage your debt and learn about maintaining a budget.
Developing Your Budget
You now know what your mandatory expenses are each month, and you can allot an additional amount for those non-recurring expenses. Once you have this total, subtract it from your monthly income. The amount remaining is the amount you can choose to spend, save, or apply to debt. If your credit and other revolving debts are significant, it does not make sense to continue to make minimum payments. Interest charges take the largest part of that minimum payment, and the only way to really reduce the debt is to make more than the minimum payment each month. Choose the debt with the lowest balance and vow to get it paid off by dumping a large part of your leftover money on it. Anytime you receive a “windfall” of money, such as an income tax refund, dump it on that debt. Once that debt is paid in full, take the money you spent on it and dump it onto the next lowest debt. You will be amazed how the balances reduce once that first debt is paid off and you are able to concentrate larger sums on subsequent debt.
It is also important to reward yourself as you pay off each debt. Do not go crazy with a reward, but a nice dinner out and a movie will make you feel that your sacrifice was worth it.
A Word About Saving
Most people get into serious debt because of two conditions – purchasing non-essential items when they do not have the cash to pay for them and unforeseen emergencies for which there is no savings. As debt is managed and paid off, it is also important to begin a regular process of saving something each month. Starting out small and gradually increasing this savings as debt is paid off is the smart responsible method of gradually accumulating a reserve. Putting your savings in a separate bank account will help keep it intact and discourage you from dipping into it on impulse.