I know you are probably wondering what debt elimination has to do with budgeting. It has everything to do with budgeting. This is a category that should be included in both your yearly and monthly budget, if you have debt that you want to eliminate. If you are deeply in debt like I was, then you will want to tackle that debt and eliminate it to free up your finances. If you are not taking the necessary steps to repay your debts, I am here to tell you that you are making a huge mistake. Debt in itself is a force to be reckoned with, but when you choose to ignore it or have no solid plan to eliminate it, it can become an even bigger force. With all of the fees and interest that debt collectors assess on your debt, leaving it unpaid can cause it to become extremely ugly in a short period of time. Creating a debt elimination plan is essential to your budget and your financial health. Below you will find an effective and workable plan.
1. List all of your debt
No matter how great or small, list every debt that you owe, even that $100 you borrowed from your mom. Although mom may not say anything, nor will she list it on your credit, you still want to pay her back, because the Bible says, “Owe no man nothing, but to love one another: for he that loveth another has fulfilled the law.” Romans 13:8 KJV. Write down what you pay on monthly as well as any debts that are behind.
2. Rank your debt
Now that you have your list of debts, rank them in the order of how you want to repay them. Some may choose the snowball effect, which just means that you pay down the smallest debt first and move in succession to the largest. Some may chose to pay off debts that have the highest interest rate first, so that, they won’t keep accruing more interest while they are working on other debts. Either strategy is okay, so choose the one that is best for you. The only debt my husband and I had, after I filed bankruptcy, was my student loans; so this was the debt that all of our extra income went to.
3. Debt as a budget category
When creating your budget, make sure that a debt repayment plan is considered. Figure out how much you can reasonably invest each month in your debt repayment. Even if you are not deeply in debt, you can still whittle them down by making sure you pay something toward them every month. The important thing is to make sure that you are realistic about how much you have to spend. Do not take money from other obligations to pay down your debt, just use money that you have outside of your normal obligations. If you find that you have no money to spare, then you may need to look into earning extra income.
4. Savings account
If you don’t have a savings account, this would be a great time to get one. Before you start paying down debt, you should have at least 3-6 months worth of savings, so you will have money to fall back on in the event of a financial disaster. When you neglect having a savings account, getting back into debt is unavoidable.
5. Start your debt elimination
Once you have your savings account, you are ready to start at the top of your debt repayment list and work down. Focus on one debt at a time, rather than spreading your budget money over numerous debts at once. You want to do it like this, because you can wipe out one debt after another and maintain your focus and momentum.
6. Extra money
If you receive a windfall, such as, your income tax or bonus from work, consider putting half into your savings account and the other half towards the whatever debt you are working on. If you have extra money left over in your budget at the end of the month, consider doing the same.
Your own personal experience will vary depending on your debt and how much money you have to work with. This is just a guideline, so design a plan that works for your own unique situation. One last bit of advice, be consistent! You will be out of debt before you know it!