Getting Out of Debt by Creating a Budget

Hopefully you have decided that getting help with debt problems is better for your future than paying everything down at about the rate of your 30 year mortgage. You would like to be able to put those finance payments towards your retirement, kid’s college, or just give it to charity. Since your learning and researching on where to get help with debt, I would like to discuss my least favoritek yet most effective tool: the budget!

The best type of budget is one that you actually follow.  Therefore, everyone involved with the money spending needs to be aware of the budget.  Everyone with decision making power needs to be involved in building the budget and agree to follow it.  That means if you have a spouse, they must sit with you and build the budget.  If they feel it’s forced on them they are more likely to ignore it causing you to run out of money.  If you have children old enough to understand I think it’s to their and your advantage to show them what the budget is so they can understand why there is only so much money.   This will probably help them budget when they are considering their own money.

Now that you’re at the table with your blank piece of paper you need to just simply write your month’s income at the top.  The next step is to start with necessities like your home, power, food, and gas to get to work, and what you need to live.  Just simply write a line item, its monthly cost, and subtract it from the total.  Then write down the minimum payments of all your bills.  Now if you have money left over you don’t put it in a slush fund.  You put a small portion of that money into every person’s fun fund, or family night fund, or whatever, and then the rest of the money goes to pay extra on the debt.

If you want to be mathematically correct you put the extra money on the debt with the higher interest rate.  If you want to be psychologically correct you put the money on the bill with the smallest balance for the win. AND let me tell you, small victories can lead to big ones, so my advice is to start with the smallest debt and pay it first.

Now here is the real hard part.  You need to pay all of your bills on the day the income comes in.  No waiting because it’s not quite due yet and you might need the money.   When you think like this you will find a reason to spend the money.  Just pay the bills, pay the extra on the debt, and put the money like food and gas into envelopes designated for each cost.

If you’re having a hard time getting out of debt because your income swings wildly up and down causing you to spend more one month, then need credit cards the next, there is a budget tool for you too.

Start with all of your bills and list them as above.  Don’t worry about your income this time; just list the expenses with the most important at the top and the least important at the bottom.   The next step is to figure out your minimum income you figure you will get in any month.  Now you will need to plan your safety net, draw a line on your expenses along the absolutely necessary bills, your most critical to survive like the house, food, power, the car.  

Credit cards and TV are not part of this super necessary.  Add the cost per month of these necessary items.  If your absolute minimum monthly payment is more than these critical payments then you need to have an emergency fund that covers the difference.  Now add to your budget (list of payments) a line to refill the emergency fund to max after your critical payments are made.  This way even if you have your worse month you will afford the necessities.

Budgeting is about discipline and this discipline will carry forward in other aspects of your life.  Your family will make smarter buying decisions, better investing decisions, and enjoy what they have more instead of wanting what’s new and hot.  Getting out of and staying out of debt requires doing things right everytime.