Budget for Repaying Debt and Repairing Credit
Many times in life, you may find that the amount of debt you have accumulated appears insurmountable. In times such as these, the thought of overwhelming debt raises fears of bankruptcy, default and the possibility of ruining your hard-earned credit. Often all that is needed to overcome the seemingly insurmountable amount of debt you have accumulated is a dedication to a well-organized and disciplined personal budget. With a well-planned budget, the debt can be eliminated over time, credit ratings may be salvaged and bankruptcy ultimately avoided.
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Things You'll Need
- All records of existing debt
- All records of monthly expenses over the past year
- All records of monthly income for the past year
- Budgeting program such as Quicken, an Excel spreadsheet or a few pieces of paper
- Calculator.
Instructions
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Realistic Expectations
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Setting up a budget requires realistic thinking. Often a budget is unusable when an individual does not honestly compute his expenses or makes unreasonable commitments to the budget. You must cut costs to increase the amount of money that applies to the debt, but you need realistic goals for a successful budget.
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First step, no more debt. Cut up your credit cards. Hide them in a drawer. Freeze them in a block of ice. Whatever you do, do not use them anymore except for absolute emergencies. Credit card debt is the worst debt to carry. Interest payments consume your hard-earned money. If you can't buy it with cash, you do not need it. If you have non-essential vehicles, sell them. If you have non-essential items in your home, sell them. No one needs a TV in every room. Sell them and use the proceeds to pay off debt. Have a yard sale. Apply the earnings to your debt.
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Add up the total amount of debts and write it down. Add up the total amount of income for the past year. If faced with a job loss or reduction in pay, add up the expected amount of income for the next 12 months. Be realistic. Divide the debt by your income to see the big picture concerning your debt. Doing so gives you an idea of how important the budget is. If your debt is significantly greater than your income you know that you need to budget, budget, budget.
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Add up your monthly expenses and subtract the amount form your monthly income. This allows you to see how much money is coming in after you pay your monthly expenses. Looking at this figure will help demonstrate that cutting out a few non-essential expenses can contribute to becoming debt-free in a shorter amount of time.
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Look at your expense list. What is non-essential. You can live without the lattes, the trips to McDonald's, eating out every Friday night. Remember, you're trying to get out of debt. All of that money is better suited to paying off your debts. Divide this amount by your total expenses to see what percentage of your hard-earned money is wasted every month on non-essential items. Non-essential items should only account for a very small portion of your monthly expenses, ideally less than 10 percent.
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Plan out your budget. According to Gail Vaz-Oxlade of the CNBC show "Till Debt Do Us Part," your total monthly expenses should be 35 percent for housing, 15 percent for debt, 25 percent for life, 15 percent for transportation, and 10 percent for savings. Using this formula, see how your debts stack up and eliminate all non-essential expenses that will bring you closer to this formula.
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Set-up your budget to fit the aforementioned figures. Follow your budget religiously. Buy only the items you need--groceries, and fixed debts such as mortgage, the car payment and insurance. If you have to cut cable, do so. Cut anything you can live without until the debt is paid then you can apply the money you were spending on debt to cable, dinner and a movie. Always in cash, never on a credit card. Preferably, you apply only a portion of this to new expenses, the majority should go into savings to provide for your future.
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Tips & Warnings
Debt can be overcome. Be dedicated and you will pay it down.
Don't get in a hurry. It took time to get into debt and it takes time to get out of debt.
Do not use your credit cards. Ideally, you cut them up and never have them to use. Don't cancel them, just never use them.
Pay down the highest interest cards and loans first. The money you save on interest will make it easier to pay the lower-interest debts.
