The Best Tool for Paying Off Debt

If you think back to how you got into debt and why you can’t seem to get out of it, I bet both answers stem from the absence of one thing – a budget. A lot of people hate the word “budget” so I’m going to try to use it a lot to get you comfortable with the thought of having one.

What a Budget is and What it is Not

A lot of people see a budget as a set of handcuffs – something that will keep from spending as much money as they want to. On one hand, that’s exactly what a budget is, but that’s not a bad thing. As humans we have a lot of urges that need controlling – the urge to overspend is one of them.

On second hand, a budget isn’t a set of handcuffs because a budget doesn’t mean your spending is imprisoned. It just means you have some self-imposed restrictions on how much you’re going to spend. A budget can be very liberating, if you make it and use it correctly.

The simplest way to think of a budget is as a plan. We use plans for other aspects in our lives – to take a trip, to go grocery shopping – why not have one for spending money.

You can also think of a budget as a tool to get you out and keep you out of debt.

Using a Budget to Manage Debt

At the end of your budget (we’ll talk about how to make one later) you’ll have a number – your net income. That number can either be negative or positive. If it’s negative, then you’re spending too much money relative to your income. That means you don’t have enough income to cover your expenses and you likely have to result to credit cards and loans to make ends meet. This cycle of spending more than you make leads right into debt. If you spending more money than you make, you face the risk of bankruptcy.

On the other hand, if that number is positive, then you have some money left over at the end of the money. You can use that extra money to start paying off some of your debt. The higher than number, the more aggressively you can pay off your debt.

How to Create a Budget

When you create your budget for the very first time, it takes longer than it will to update your budget every month. But it’s only one time and it’s time well invested.

Start your budget by listing all your income for a month. Include money from wages, bonuses, child support, alimony, and anything else you consistently receive from one month to the next. If you need help refer to your bank statement to see which deposits have been made to your account. Total your income.

Next, list out your expenses. Here are a list of categories for most of your expenses:

• Housing Costs like rent or mortgage and insurance
• Utilities
• Debt Payments
• Food
• Transportation Costs
• Savings and Investments e.g. Pensions
• Family Obligation
• Entertainment

Once you’ve written out all your expenses, total them up.

Subtract your expenses from your income to come up with your net income.

What to Do With a Negative Net Income

Having a negative net income is a problem. It means you don’t have enough income to meet your expenses. To fix it, take a closer look at your budget to make sure you didn’t over-budget in any category. Then, look at again each item you’ve budgeted and decide whether you can cut back spending on that item. For example, you might be able to cut your grocery bill back. Or, if you have cable television, you can go without it for awhile. If you can’t reduce your expenses, the other alternative is to increase your income.

Make sure you’re having the right amount of taxes taken out of your check. Consider getting a second job to compensate. Do what you can to turn that negative income into a positive.

If At First, You Don’t Succeed

Track your spending during the month to see if you actually stayed within your budget. Don’t be surprised if your budget doesn’t work perfectly the first time around. A budget is a work in progress. Once you see how what you spend compares to what you budgeted, you can adjust your budget as you need.

You should also adjust your budget periodically as things change in your life. For example, if you get married or buy a house, your budget needs to change to reflect that.