How to Design a Budget and Debt Reduction Plan
Designing a budget and a debt reduction plan is something that everyone should know how to do. It is probably one of the simplest tools for money management, as it does not require much more than paper and a pencil and time. In a perfect world a person should do a budget when he receives his very first paycheck and a debt reduction plan when he makes his first purchase using any debt instrument. But the world is not perfect, so the best time to begin is any time a person wants to gain more control over how he spends his money.
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Instructions
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Determine how much income you have available. This is done by determining how much income is available regularly in a regular time frame. If you receive a pay check once a week for $500 and have no other income, you would begin with $500 per week as your starting point. The best way to set up your budget is to create a spreadsheet either in a computer program or on multi-column paper with a description column and currency columns. You can start with just a one-month time frame or you can extend it out for an entire year. For this example we will assume a 4-week (1-month) time frame. At the top of each currency column, you should enter the dates of the next four paydays. On the first description line in the description column you should enter Income from Paychecks. On that same line in each column, you should enter $500 or whatever amount you project for each of your paychecks. This should be the net pay--the amount you actually receive after all payroll deductions.
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List all consistent expenses in the description column. These are items like car payments, car insurance and items that you must pay every month. Review the next four payday columns and choose the columns for each expense that allows you to make the payments on time with appropriate time for mailing and funds availability clearing. Next, list the weekly expenses that you incur every week, such as weekly transportation costs and grocery expenses.
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Total the expenses. Subtract the total expenses from the total income in each column. If you still have additional funds available, then you can add two lines to the description column--one for discretionary spending and one for debt reduction. You can decide how much you want to put in each category or you can put it all in one category based on whether you want to have more money to spend or if you want to pay your debts off more quickly.
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Create your debt reduction plan by listing your debts either from smallest balance to largest balance or from highest interest rate to lowest interest rate. The smallest balance scenario generally allows you to pay off the number of debts you are carrying more quickly, while the the highest interest rate scenario generally allows you to save the most interest over the life of your debts. For either scenario to be effective when you pay off the top debt on your list, you must take the extra amount that you are applying to debt repayment and apply it to the next descending debt on your list.
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Continue your budget by setting up each month. Some months will end up with an extra payday and you will actually have some bonus money available that you can consider a windfall. Use it as you please or add it to your debt reduction plan for faster results.
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