Putting Your Debt on a Diet
Just as dieting can help you lose weight, a well-planned budget can help you reduce your debt. In a perfect world, a person’s income would be more than enough to cover their debt. However, the world is not perfect and more often than not, a person’s debt greatly outweighs their income. By setting a budget, you can put your debt on a diet and eliminate unnecessary expenses.
Debt dieting starts with pen and paper, or if you prefer, you can use a spreadsheet program. You first need to determine how much income you have available. Create a list of your net income; the money you receive after taxes, insurance and other automatic payroll deductions. Include any income from rental property, child support, investments, etc. Include when and how often you are paid. You need to know exactly how much money you bring home each month.
Next, document your monthly expenses including rent, utilities, transportation, groceries, entertainment, etc. If you have loans and credit cards, make note of interest rates you are being charged. Also note when payments are due and how often. Monitor your activities over the course of a few weeks and add anything you might have missed when creating your original list.
Once you know where your money is going, the next step is to determine in what areas you can eliminate some of the expense. Consider shopping for a cheaper insurance premium. Ask if you can get a discount for combining your automotive and home insurance plans.
If you are an impulse shopper, make a list of items you need to buy and stick to it. Carry cash so you cannot overspend.
Check with your financial institution and credit card companies to see if you can refinance or consolidate high interest loans into ones with lower interest rates. Try carpooling or public transportation two or three times a week. And most of all, stop spending! There are many ways to get low-cost, no-cost entertainment, reduce your utility and grocery bills. It just takes a little creativity and persistence.
Once you have your totals and you’ve eliminated unnecessary expenses, you need to subtract the expenses from the income. This will tell you how much extra income you have available to apply towards reducing your debt.
If you still don’t have any available income, take a practical approach and consider getting a part-time job for a while. Take inventory of your possessions and sell items that you don’t need – and remember, there’s a difference between the things you want and things you need.
Apply this extra income to your bills with the highest interest rate. Pay more than the minimum amount and make an extra payment when possible. Once that bill has been paid off, utilize the money to pay off the next high-interest bill. Rinse and repeat.
Above all else, when putting your debt on a diet, be realistic. Don’t set such a stringent budget that you struggle even more. Ensure your budget sets aside money for emergencies and that it includes money for occasional rewards for sticking to your plan. With persistence now to reduce your debt, you can reap the rewards of more financial freedom later.