How Having a Budget Can Help You Get Out of Debt

budgetingIt is bad enough to be in debt, but this is not one of those things that will go away if you let it alone.

In fact, it is the opposite of quicksand, in the sense that if you don’t do something, you will be pulled under.

Now, if someone suggested you to devise a budget, you’d probably be all like, ‘sure, I’ll do that last year, when I wasn’t in debt.’ Incredulity aside, a budget is indeed a great method to climb out of the red for good.

What Is a Budget?

You might be thinking that everybody knows what a budget is, but do they really though? If they did, so many people would not be in debt. However, it is quite simple, actually.

A budget is a plan detailing how you’re going to distribute you’re income, so that you don’t spend more than you make. In your budget you allocate different quantities of money to categories like taxes, food, clothing, utility bills, loan payments, medical bills, mortgage payments, emergency and retirement funds, credit card payments, savings, etc.

You can use software such as Excel spreadsheets, but simple pencil and paper will do just fine. Now that we have that clear…

How Does a Budget Help You Out Of Debt?

The first thing you need to make sure of is that your net income is positive. Net income is the amount of money you have left after paying all of your bills, and meeting all of your financial responsibilities.

If your net income is negative, that means that you budgeted to spend more than you earn. If that’s the case, you need to go back to the drawing board and make a few adjustments.

Obviously you can’t reduce the amount you plan to spend on rent, for instance. You could try, but your landlord might disagree. So what you have to do is make adjustments on variable expenses, such as groceries, and utility bills.

That is also a great way to cut back on unnecessary expenses. For example, using tab water instead of buying bottled water. If you manage to spend less on shopping, that’s money you can use to pay down your debt.

Budgets Are Flexible

Your budget is not like the Ten Commandments; it is not set in stone by any means. You can continue to update it and adjust it month after month.

Even if you go over budget at times, that’s not such a bad thing; that will help you to notice where you’re overspending, and thus where to make cuts.

Keep in mind that your debt payments shouldn’t come off only from what you save with your new budget; that’s just an extra. You need to set aside a very specific amount on your budget devoted solely to debt payments.

Also, make a file with bank and billing statements along with your budget, in order to help you confirm your income and expenses.

 

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This article is provided courtesy Pocket Savvy, a personal finance website, with the best money saving tips and financial resources to help you improve your money management skills. Follow Pocket Savvy on Twitter and connect on Google+ and Facebook.