This article was contributed by OnlinePaydayLoanConsolidation.com
Budgeting and debt! Two dreadful words… right? Especially for a person who hates to budget and is struggling to repay debt.
But budgeting is essential, especially when you’re trying to pay off debt.
So let’s see if it can be made simple for you so that you can start budgeting and ultimately pay off those debts.
How a Budget can Help
As I always say, budgeting is the most basic step of financial planning. The advantages include:
You can have full control over your money.
A budget helps you to avoid spending unnecessarily and helps you control your dollars. You can focus on attaining your short-term and long-term money goals.
You can plan your spending and saving.
By categorizing your money, you can analyze where you’re spending unnecessarily. You can curb that spending and save that amount to repay debt.
You can get a signal if anything is not right.
Yes, a budget gives you the warning signal that you’re vulnerable to falling into debt. It helps you make adjustments to avoid such a situation in the future.
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You can increase your earning and saving.
When you plan a budget, you get to know whether or not you need to earn more to continue with your present lifestyle. When you’re trying to repay debts, extra earning always helps. Moreover, earning extra can also help you if you want to save more.
You can assess how you can pay back debts.
A budget gives you a clear picture of your present financial situation. You can decide whether or not you can repay your debts in full and it helps you to formulate your debt payoff strategy. Plus, you get to know whether or not you’re capable of taking additional debt.
So now you can understand why a budget is an essential thing to manage finances and repay debt.
Types of Budgeting
Apart from the traditional budgeting strategy, you can try out any of these strategies to see if they can help you to plan a realistic budget that you can follow with ease.
This strategy helps you to differentiate between your needs and wants.
First, divide your after-tax income into 3 categories: needs, savings, and wants. You need to limit your needs to 50% of your after-tax pay.
Then, allocate 20% of your earnings towards debt payments and savings. However, when you’re paying back a credit card debt, it is rather a ‘need’. So, you can put this payment into the 50% ‘need’ category.
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Then comes your ‘wants’ for the remaining 30%. However, it’ll help you if you can save from this 30%. If you have additional expenses in a month, you can use this 30%; otherwise, you can save this amount for emergency purposes.
This strategy works quite well if you don’t know where your money is going.
To plan such a budget, first list your spending categories and divide your money amongst them. For example, you can create categories like grocery, transportation, medical, insurance, and so on.
You can even make sub-categories if it can help you plan the budget.
Then assign the dollar amount of each category (not sub-category) to envelopes. Make sure you use money from the designated envelope only. When you use the amount from one envelope, write the remaining amount at the top of it to help you know how much is remaining.
What should you do if you have an irregular income? Can you use this budgeting strategy? Yes, you can. Just consider your lowest earning as the base upon which to plan the budget. On a good month, put the remaining amount into savings or splurge a little.
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The goal of this strategy is to assign every dollar for a purpose. Your income minus expenditures needs to be zero.
What about when there's a remaining amount left over? Add it to your next month’s budget or put it into your emergency fund.
Like in envelope budgeting, you distribute your money amongst your selected categories.
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To start budgeting like this, it helps if you analyze your expenses over previous months. Doing so will help you plan a dollar amount for every planned expenditure.
Feel free to try out any of these strategies and choose one that helps you the most to plan a realistic budget.
Don’t expect to get results in the first month itself. You’ll have to go through a trial and error process to plan a realistic budget that you can follow effortlessly. Then you can use the savings to repay your debts as soon as possible.
What to Consider While Planning a Budget
Consider these things when you’re planning a budget to repay debt:
- Identify which expenses you can curb easily.
- Decide whether or not you need to earn extra income to repay debts or to have a comfortable lifestyle.
- Consider whether or not you need to allocate as much as possible to repay debts.
- Decide whether to stop investing until you repay your unsecured debts and be current on the secured ones.
- Will you be able to solve your debt problems on your own or will you require professional help?
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Even if your finances have held control over your life up until now, it’s your turn to take control over your money. Planning a realistic budget and working to pay back debt will put you back on the right path for planning your financial future.
This article was contributed by OnlinePaydayLoanConsolidation.com