Whether it’s a mortgage or for financing projects, accumulating debt is a common thing in the United States. As at June 2020, the total amount of consumer debts owed in the US totaled about $14.3 trillion.
However, getting out of debt is not an unachievable task. Once you’ve made up your mind, got the right tools and worked at it, you may be surprised at how your debt will disappear in no time.
One of the most powerful tools that can help you with this goal is budgeting. Practicing consistent and effective budgeting doesn’t only help you avoid debt, it’s one quick way to pay off your debt. In short, budgeting keeps you in charge of your financial destiny.
In this article, you will find the right way to go about budgeting, as well as other effective practices that can help you get out of debt.
What is Budgeting?
Generally, budgeting is associated with finance. It is simply creating a plan on how to spend your money. Budgeting means coming up with a plan on how to carefully manage your income in order to meet your personal and financial goals, and achieve financial freedom and security.
If you ever want to live debt-free and stay away from financial stress, you must learn how to manage your money – balance expenses with income. And that is what budgeting helps you do.
Benefits Of Budgeting
Here are some advantages of budgeting to you:
It Helps You Work With a Financial Plan
Budgeting helps you know and keep your long-term goals in view while you spend. When you are working with a plan, you can set your priorities right, save your money, and easily track your progress.
It Helps Ensure You Spend Less
Credit cards have no doubt made life easier. However, recently, the purpose of credit cards have been abused and many have run into debt. They barely realize they are overspending until they are in deep debt.
Budgeting helps you live within your means. It helps you monitor how you spend and avoid unnecessary things. You’ll know exactly how much money you earn, how much you can afford to spend each month, and how much you need to save.
It Helps You Plan For Retirement
More important than spending wisely today is saving for the future, and budgeting can help you with that. A good budgeting should accommodate investment contributions.
Setting aside a fraction of your earnings monthly to contribute to your IRA, 401(k), or other retirement funds is vital. It will keep you on the path of financial freedom in your inactive days, so you will have a continuous flow of cash and stay out of debt.
Although you may have to inconvenience yourself now, you’ll enjoy the benefits in later years.
It Helps You Prepare for Emergencies
Life is full of uncertainties which can bring about some serious financial crises. Sometimes, these emergencies tend to arise at the worst possible times—when you’re short on cash. This is the reason everyone should prepare ahead of time by keeping an emergency fund.
Budgeting helps you save, and these savings can be your way out in times of emergency. When creating a budget also, there is a provision for an emergency fund. This extra money will ensure that you don’t pile up debt while handling a crisis.
The Best Approach to Budgeting and Getting Out Of Debt
#1.Make a List of All Your Debts
This is the very first step in budgeting to remedy your debts. You need to make a list of all your debts. This should include your credit cards, personal loans and even your mortgage. If you owe any member of your family or friends, you should also include it on your list.
#2. Rank Your Debts In Correct Order of Priority
Next, you should arrange your debts in order of urgency or how you want to pay them off. For some experts, going from the smallest amount to the largest is a better way to rank your debts.
Some other experts recommend listing the debts according to their interest rates. The ones with higher interest rates such as consumer debt; credit cards, should come before the ones with the lowest interest rate. This is a wise approach because the more the debt stays, the more interest it attracts, and the more your debt rises.
You can also leverage some debt reduction software that can help you rank your debt and suggest a strategy for paying it off
#3. Track Your Expenses
You should do a run-down of your expenses for each month. This is to help you track how you spend your money and what you spend most on. If you are able to identify this, then you can begin to make adjustments.
#4. Create a budget.
Creating a personal budget (spending plan) will help you live within your means. List all your expected income and expenses for the month. Allocate money to your expenses.
Your budget should include savings, an emergency fund, and allocations for paying off your debts.
#5. Develop a Debt-Reduction Plan
You may need to cut back your spending on some things so that you have money to pay off your debt. You’ll need to trim your expenses as much as you can.
A good tool that can help you with this is a bare-bones budget. This tool cuts your expenses as low as they can go and enables you to live on as little as possible for as long as you can.
#6. Find Extra Money to Pay Your Debts
You can decide to take on a part-time job or add extra hours on your current job to boost your earning power. Another option is selling some items you no longer need to earn extra money for your debt payment plan.
In addition, you may want to assign all the money you get from bonuses, gifts, or tax returns to your debt in order to enhance your debt payment.
Budgeting is one of the smart ways of getting out of debt. The best part is that it’s a practice that you can do by yourself, you just need to understand how to do it right to get an effective result.