Budgeting Tips to Get Yourself Out of Debt

Budgeting Tips to Get Yourself Out of Debt

The American financial system is seemingly designed to get people into debt as soon as possible — and keep them there as long as possible. For substantiation of this, one need only look at the $1.5 trillion in student loan debt currently burdening some 44 million of America’s youth. And, once they dig themselves out of that hole, they’ll still be looking at car loans, mortgages and credit card debt.

Debt financing

If this already describes your life, here’s some good news. You don’t have to live with it. Consider implementing these smart budgeting tips to get yourself out of debt.

1. Figure Out Where You Are

To start, you’ll need to get a clear understanding of how much money you make each month and how much of it you’re spending each month. To do so, calculate your total monthly take home, considering all sources, whether it’s from your 9-to-5, side hustle money, spousal support, whatever. Total it all up so you can see how much you have to work with.

Next, add up all of your monthly obligations. If some bills are quarterly or annual prorate them over 12 months so you can see how they fit in too. Line items should include savings, housing, food, utilities, transportation, Insurance, personal expenses, consumer debt and entertainment.

If the total of the former is higher than the sum of the latter, you’re in good shape. If it’s the other way around, you’re going to have to make some tough decisions. Either way, you will benefit from cutting back.

2. Dial Back Your Spending

With the help of a budget planner like the one offered by Clarity Money, go over all of your expenditures with a fine-toothed comb to find places you can spend less, while still enjoying your life.

You’ll be surprised to discover how many ways you can save while living well. Be realistic though. Cutting all of the fun and pleasures out of your budget will make you fall off the wagon after a few months — it will be too brutal.

Leave yourself some room for fun.

3. Reapportion Funds

Once you’ve become accustomed to living with cost saving (a couple of months or so ought to do it) compare your expenses to what they were before you started paying attention. You’ll definitely have more money left over each month. Whatever it adds up to, set it aside for Step 5 below.

4. Assess Your Debts

Some of the expenses you listed when you took stock of your obligations are fixed. In other words, you’ll always have those, regardless of what you do. However, credit card debt, your mortgage and your car loan can be eradicated from your life — forever — if you so choose.

Make a list of all of those debts, ranking them from the lowest balance to the highest balance. Take note of the minimum monthly payment each one requires. Going forward, this will be the amount you’ll pay on all but the one with the lowest balance—until that one is paid off.

5. Apply the “Snowball” Strategy

Said differently, rather than continuing to pay as much as you can on each obligation, make the minimum payment on all of them except the one with the lowest balance. You’ll then apply all of the leftover money from that cutback — along with the extra cash from cutting your expenses — to the account with the lowest balance. Continue doing so every month, until it is paid in full.

Once that one is satisfied, keep it open — but don’t use it anymore. Keeping the accounts open will help strengthen your credit rating at the same time. Add all of the money you were paying toward that account to the minimum payment you were making on the next lowest balance and repeat the process until it too is settled.

Continue working your way up through your debts until they are all satisfied. You’ll have more money to apply to each account as you progress, so you’ll clear them up a lot faster. Windfalls should be applied to the plan — less the 10 percent you apportion to savings. 

When they’re all settled, add the money you were using to pay them off to your savings each month. That way, you’ll be debt free and well on your way to accruing an outstanding nest egg.

The main thing here is to stay focused and avoid falling into the trap of using one of the accounts again just because it has a zero balance — you’ll be digging another hole for yourself.