How to Create a Budget and Manage Your Debt Effectively
If you find yourself struggling with debt management, check out these tips on how to create a budget and manage your debt effectively.
Disclaimer: This is not professional financial advice and is not meant to substitute one. We are not financial advisors. These are just tips based on our knowledge and personal experience. Please seek financial advisors if you need financial advice.
Assess your financial situation
Before you even create a budget or manage your debt, you need to know where your current financial situation is.
Gather your financial information and list all your income, expenses, debts, and savings. Be more specific with your debt. Write down the amount, interest rate, and loan period.
Now you know how much you earn, how much you owe, and how much you have, since these values tend to be fixed, the next step is to see how much you spend, a value you can change anytime.
Track your expenses
You can’t really start creating a budget without knowing how much you need to spend. It is important that you track your expenses to know where your money is going.
First, list all of your expenses. Then categorize them. Some common categories are housing, food, transportation, etc. You can also break down the food category further into groceries and dine out categories.
Once you have listed all expenses, identify which ones are must-have and which ones can be reduced or eliminated. Check out these tips on how to save more money.
Set financial goals
While it is important to pay off the debt and cover the expenses, let’s not forget that there are other financial plans and obligations that can just be equally important. Things like emergency fund, tuition, wedding, vacations, or retirement etc., are important things that need to be planned ahead.
Setting clear and achievable financial goals will help you create a budget and manage your debt more effectively.
Create budget
Now that you know how much you earn, how much you owe, how much you have, how much you spend, and your realistic and achievable financial goals, it’s time to create a budget to help you meet your financial needs.
Create a budget so that it covers your must-have expenses and debt obligations, while leaving room for savings or other financial goals.
But how do you manage your debt more effectively?
Prioritize debts
Not all debts are created equal. If you haven’t already, list all of your debts including amount, interest rate, minimum payment and loan repayment period. Prioritize paying down debts that have higher interest rates or shorter loan repayment periods.
While certain debts have required minimum payment, unless it’s mortgage payment, you don’t want to pay just the minimum. The problem with paying only the minimum payment is that later in the loan period, you may have to come up with much higher payments in a shorter period of time. To not feel overwhelmed later, it’s better to divide the owed amount by the number of months allowed on your loan repayment period and include that monthly amount in your budget.
For example, if you borrow $2,000, and you have to pay back in 12 months, even though the monthly required minimum payment is $50, you don’t want to pay just $50. If you pay just $50 per month for 11 months then you will have to come up $1,450 in the last month. Going from $50 to $1,450 all at once is a big jump, and it can leave you feel overwhelmed, especially if there are other unexpected expenses in the same month. You may feel less overwhelmed paying $167 per month for 12 months.
For debts that have high interest rates, even if they have low monthly required minimum payment and no fixed repayment period, you want to pay down as much and as soon as possible. When interest rate is high, interest can increase your balance quickly if you only pay minimum and don’t have a fixed repayment schedule.
But what to do if you find yourself struggling to have the extra money to pay down the debt?
Reduce expenses
To get that extra amount of money needed to pay down the debt, reducing expenses may be the fastest option. Finding another job may take time, but cutting down unnecessary expenses can be done anytime.
If you haven’t already done so, check your list of expenses and see what other expenses you have beside the must-have expenses. Can you reduce or eliminate those expenses? Do you have any subscriptions that you no longer use or rarely use?
Increase income
There is a limit to how much you can reduce your expenses. Since you can’t keep reducing your expenses, increasing income is another way to get that extra money to pay down your debt. It also helps reduce the need to incur more debt.
To increase income, you can either increase your pay from your one job or increase income sources. You can increase your current pay by negotiating for a raise, getting promotion, or getting another job with higher pay. There are many ways to increase income sources. They include but not limited to dividends, real estate investing, side hustles, side jobs, etc.
Build emergency fund
Having an emergency fund helps you avoid relying on credit and incurring more debt when you have unexpected expenses. The common practice is to set aside an emergency fund that can cover 6 months to one year of living expenses. The idea behind this timeline is that if an unexpected situation happens and you need to find another job, you have enough time to do so without worrying about covering expenses. Start small then build up your emergency fund.
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Seek professional advice if needed
If you feel overwhelmed and need help with managing your debt, consider seeking help from certified financial advisors to create a personalized plan or strategies for your specific situation.
Stay committed
Create a budget and stick with it. It takes discipline and consistency to create a budget, stick with it, and manage debt effectively. Track your expenses, review your budget regularly, and make adjustments if needed. Don’t forget to celebrate milestones along the way to stay motivated.
