How Budgeting Could Help You Pay Off Your Debt

As the famous saying goes, money makes the world go round. However, staying on top of your finances can be a daunting task. Luckily, budgeting is a great tool for effectively managing your money. Proper utilization of a budget could help you set financial goals and efficiently achieve them. 

How to Make a Budget: 

1. List your income. 
2. List your expenses. 
3. Subtract your expenses from your income. 
4. Track your transactions. 
5. Make a new budget before the month begins. 

Let’s Dig a Little Deeper 

Begin the Month with a Zero-Based Budget 

Zero-based budgeting is a method in which you allocate a percentage of your income to necessary monthly expenses (rent, groceries, bills, etc.), including savings (emergency funds), and debt payments (such as student loan payments). The end goal is that your income minus these expenditures equals zero by the end of the month. This may seem like you’re living paycheck to paycheck, but the key difference is that you’re putting money towards your financial goals like savings and debt repayment.

Begin Your Budget Cuts

We understand- it’s hard to cancel your cable, dine out less, or spend less online shopping. But you could end up with significantly more in your bank by making these small adjustments. 

Start with the Most Important Categories

All monthly budgets begin with the income you take home from your paycheck after taxes and other deductions. This is the money you have left to spend on your necessary expenses. So let’s begin with the categories you should set money aside for first.

1. Housing: rent, mortgage, HOA dues, and other home maintenance costs. 
2. Transportation: car payments, registration, DMV fees, gas, maintenance, parking passes, public transit costs, etc. 
3. Food: restaurant meals, work lunches, food delivery, grocery shopping, etc. 
4. Utilities: water, electricity, HVAC, gas, etc. 
5. Insurance: health, homeowner’s, life, auto, etc. 
6. Medical & Healthcare: out-of-pocket expenses, dental, urgent care, prescriptions, supplements, etc. 
7. Savings, Investments, Debt Payments: emergency funds, credit card bills, personal loans, student loans, etc. 

Paying Off Your Debt

Paying off your debt should be your top priority. Begin the process by making a comprehensive list of all your debt amounts, as well as details like interest rate, monthly payment amount, and due date. While you’re at it, take a look at the areas where you’ve overspent in the past. Be honest with yourself and resolve to make changes to your budget. 

High interest rates can dramatically slow down your debt repayment process. After you’ve made the list of your debts, plan to first repay the ones with higher interest rates. 

Pro Tips on Reducing Debt:

1. List your debts. 
2. Check your credit report. 
3. Determine where you got off track. 
4. Address high-interest rates. 
5. Create a debt repayment plan. 
6. Make your payments on time. 
7. Create financial goals. 

Final Thoughts

The purpose of budgeting isn’t to limit your freedom, it’s to invest in your financial future with the goal of  obtaining longevity in financial freedom. Once you begin implementing these practices, you’ll be on the way to loving your life without feeling tied down to your bank account.