A budget can be a fantastic tool to help you get out of debt as well as a great habit to help yourself stay out of debt.
Imagine trying to drive somewhere with no idea how far away it is, how much petrol you have in the tank and which route to take. You might get there or you might not, but it will likely be much more efficient to have some sense of a plan before you set off. Managing your debt is the same way. It is so much more difficult to reach your financial goals if you have no concept of how much money you owe, how much you are earning and how long it will take you to pay it back. Making a budget will help you to get a better picture of your finances so that you can meet your goals of getting out of debt.
A budget doesn’t have to be difficult to make or follow. You don’t need to be an expert accountant; all you need is a piece of paper and a pencil or spreadsheet software. Simply list all of your recurring bills such as rent, utilities, food, etc. and make a tally of where your money goes every month. If you have debts, don’t forget to include them and any interest payments that you are making on them. The other part of a budget is totalling your income from any sources to get a total amount of everything that you bring in each month. The basic rule is that if the outgoing expenses exceed the in-coming amount, then something needs to change.
How can making a budget help you to get out of debt? Here are some of the ways that a budget can be a very helpful debt management tool:
It Can Show You Where You Can Cut Back
By tallying up all of your expenses in your budget, you will be able to see any opportunities to cut back on spending so that you can put that money towards paying down your debt instead.
For example, if you realise that you are spending a lot of money on your gym membership and never really using it, you might decide to take up jogging and exercising at home instead to save money. If you see that you have been spending a lot of money eating out in restaurants or ordering takeout, you might decide to start cooking your own meals at home. You can take all of the money that you would have spent on these expenses and put it straight towards reducing your debt so that you can accelerate towards your goals. Without making a budget, you might not find yourself aware of how much you are spending on these expenses.
It Can Motivate You towards Your Goal
Paying off debts can sometimes be a long and difficult process and if you are cutting back on expenses or working overtime to pay them this can get tired after a while. If you are not tracking your process, it can be easy to feel like you are not getting anywhere. This can cause you to feel discouraged and to give up on your goals.
When you have a budget, you can track exactly how much of your debt you have already paid off and how much there is left to go. This is very rewarding and helps you to keep in track. Every time you enter a debt payment into your budget, you will be encouraged to keep moving towards your goals.
It Will Help You Think Long Term
It is short term thinking that usually gets people in debt in the first place, as they will borrow money without a plan for the future to pay it back. However, making a budget will help you to adjust your financial picture for the long term. You will be able to look at your finances and make projections and goals for the future. You can make a plan to pay off debts as well as save up an emergency fund which will help you stay out of debt when the next unexpected expense comes up.
These are just a few of the ways that making a budget can help you with your debt management.
Bob Emerald is a freelance writer who incurred a lot of debt. However, he successfully managed to pay of the entirety of this debt. He writes for MyDebt.co.uk, a service that helps over 1,000 people every month with their debt management.