How to budget to fit your income – Part 3: Managing Debt.

How to plan your budget Part 3

Debt! That dreaded four letter word.

It’s the money we owe that sucks our lives dry and we never seem to put a dent in it. We think about what we could spend the money on and it eats away at us that we can’t, so what to do?

Firstly, you’re on the right path. It has been proved many times that having a budget and allocating money each month towards debts helps to get them paid off. So here we will be having a 5-pronged approach to your debt:
  1. Listing all your debts* in order of balance.
  2. Setting them up to only pay the minimum each month*.
  3. Promising yourself to NEVER USING CREDIT AGAIN!
  4. Adding any additional money left over from your budget each month to the first debt on the list ONLY.
  5. Once that is paid off, using the money you paid each month on that first debt and put towards the next debt on the list (Snowballing).
So first order of the day is to find out what you owe*, then add your debts to the budget sheet in order of balance, smallest one first and then you need to enter the MINIMUM amount that you can pay each of them every month.
*NOTE: This is where the sh*t gets real for some people and it may be hard to deal with. Firstly, know that you are not alone and there are plenty of people or organisations that can help you. Please don’t bury your head in the sand at this stage, seek help from professionals if you are unsure or scared with how to proceed, contact Citizens Advice or StepChange (please don’t go to a fee-paying agency), or email me with your worries and I will try to help (I am not a financial advisor so am limited to what I can do unfortunately).
worried
You must know what you owe and how much each month you have to pay back. This is hard as it may mean speaking to your debtors, but don’t worry, at the moment you are only asking them one simple question, what is my minimum monthly payment, no more than that. You may need to tell them that you are in the process of working out your budget depending on what you owe them and when you paid them last, but again, you just need to know the minimum that you can pay at present. You may be pleasantly surprised to find that some may withhold additional interest for a period of time for you without you even asking if they know that you are in financial difficulties.
Once you’ve done that, go get yourself a glass of wine or something stronger – you’ve earnt it. Seriously, that is the hardest bit out of the way – you now know the full extent of your debt and your monthly minimum payments towards it – now we can see if it fits in your budget. Next on the agenda is something that is magically important…

PROMISE YOURSELF THAT NO MATTER WHAT, YOU WILL NOT USE CREDIT FOR ANYTHING EVER, NEVER AGAIN!

Now this is something that will put you straight back to square one if you stray from it – do not, under any circumstances, pick up your credit card to pay for this weeks shopping, those shoes that you deserve, that lunch that you just ate out. You must be strict here and NOT use credit, at all, ever again!
This was hard for me – I kept my cards ‘just in case’, I paid for things because I got security with my card payment, I did all the things that are just running through your head now. But let me tell you – I started my debt-free journey about 8 months ago, and because of that thinking, I am in exactly the same spot I was then! I could have been debt free in about 6-7 months, but instead I’m looking at over a year to go – NOT FUNNY!
Cutting up credit cards. Image shot 2008. Exact date unknown.
So, if you really MUST keep that card specially for flights or presents or anything else ONLY USE THEM IF YOU HAVE THE CASH SAVED TO PAY IT STRAIGHT OFF IMMEDIATELY AFTER! No-one can make you change your mind if you believe you still need CC’s, you make that decision yourself, but I beg you, don’t learn from your mistakes, learn from mine instead.
Here’s an example of how your debts will look on the budget sheet:
Debts
Hopefully, you can see on here that any interest is added to the right hand side of the outgoings columns, you can also add on this side any expenditure that you might have on your car (for those shoes for instance!). Therefore, the total paid is the monthly minimum less any deductions on the right, in this instance, the interest. The balance is a sum in excel and starts with the balance you had to begin with – what is shown is your balance as it will be at the end of November after all deductions and payments are complete. I will explain this in further detail later.
At this moment, we’ll skip No.4 for now as we won’t be adding on any additional money to pay off your smallest debt, we want to see what’s left once your budget.
And we’ll skip No.5 too, as Snowballing is a whole other post all on it’s own.
So, that’s part three of the budget done then, on the home straight now – all the bills and debts are now allocated, just running costs to go!
How to plan your budget Part 4
See you next time,
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