How to Budget Your Finances While in a Lot of Debt

Ditch your credit cards and live within your means.

It was bound to catch up with you at some point: a shopping spree here and some expensive nights out there -- all on credit. At the time, you thought you would pay it off in the next couple of months. But like it does for so many, a lack of planning and a busy schedule resulted in a debt bill that only grew larger. Minimum payments have you feeling like you're just giving your money away without making a dent. Don't lose hope just yet; there is a way out. Learning how to budget your finances while in a lot of debt will help you get rid of your balances and live within your means.

Instructions

1. Stop incurring new debt. This applies especially to credit cards. Cut them up or freeze them in a bowl of water in your freezer. Whatever you do, resolve not to use them again.

2. Write down all your expenses and income. This is key, as you never know how much you owe and spend unless you see it in writing. Do not overlook "small" purchases, like your morning cup of coffee or quick stops at the local fast food joint. Log everything. Then, write down all of your household income.

3. Prioritize what you need and eliminate what you don't from your list. Create a budget from your results. From your expenses list in Step 2, decide what are absolute necessities and what are simply wants. Keep the essentials, such as rent/mortgage, groceries, insurance, etc. and scrap the rest.

4. Pay off debts in ascending order. Write down all of your outstanding balances, with the lowest number first and ending with the largest amount you owe your creditors. With the money you save from eliminating wasteful spending, start making minimum payments on everything but the smallest debt. Pay extra on that, and once it's paid in full, apply everything you paid to the next smallest debt on your list. Do this until you reach the bottom of your creditor list and have paid off all your balances.

5. Develop and live on a budget. From your necessity and income list, create a schedule to pay your bills, pay off your debt and set aside money for savings. You can spend whatever is left over, if you desire, or you can put that currency away in emergency funds that will be available if you happen to incur an unexpected bill (medical, for example) or lose your income source.

6. Resolve to live debt-free once your old debts are paid down. Do not celebrate your debt freedom by racking up more debts. Learn how to pay for everything in cash. Once the allotted money is gone, it's gone until the next month. Control your impulse spending and continue to live on your budget.

References

• Motley Fool: Sixty-Second Guide to Getting Out of Debt
• Dave Ramsey: Get Out of Debt With the Debt Snowball Plan
• Get Rich Slowly: How to Get Out of Debt
• CNN Money: Making a Budget