Dreaming of debt freedom, but not quite sure how to get there? This is where a budget comes in. You can think of a budget as a roadmap for your money. It can help you get from where you are to where you want to go.
Here’s all the information you need to make a budget, stick to it, and start your journey towards debt freedom.
How to Make a Budget and Become Debt Free
A budget is a personal finance tool that helps you account for how much money you have coming in and how much is going out. A budget can help you understand where your money is going and if you need to make changes to your lifestyle to reduce expenses.
A budget is also a useful debt repayment tool. It can help you stay on top of your debt repayments and guide you towards your financial goals.
Now that you know what a budget is for, here’s a step-by-step guide for how to make a budget.
1. Understand your current situation
To get to where you want to go, you need to know where you are. It’s time to get really honest about your debt, income, and expenses.
- Create a debt inventory. List out each of your debts, including loans, lines of credit, and credit card debts, to determine exactly how much you owe. This might feel scary and intimidating, but you need to be honest about your situation.
- Tally your income. Determine your income. How much money do you bring in each month? This can include income from your job, side hustle, benefits, or child support. Tally it all up to see how much money you’re working with. If your income varies, use your lowest earning month as your total.
- Track spending. Now, start to list your expenses. You can categorize these into fixed, variable, and non-essential. Fixed expenses include items that stay the same each month, like your rent, mortgage, or car payments. Variable expenses vary from month to month, like groceries or gas. Finally, non-essential expenses are ones that you don’t need, such as shopping or eating out.
2. Calculate cash flow
When you have all of your numbers together, it’s time to subtract your total expenses (this includes debt payments) from your income. If you get a positive number, you’re on the right track. If you come up with a negative number, this tells you that you’re currently spending more than you’re making.
3. Cut non-essentials or increase income
If you have a negative number, you’ll need to find ways to cut from your budget. You can start with non-essential items. Look over your non-essential expenses and see if you can reduce your monthly subscriptions, costs of eating out, or entertainment expenses.
At the same time, think about how you can increase your income. Can you take on more shifts at work, get a part-time job, or start a side hustle? Cutting costs while also bringing in more money can help to super-charge your debt repayment.
4. Pick a budgeting method
Now it’s time to pick a budgeting method. A budgeting method will help you structure how you manage your money. You can use it to determine how much you want to spend in each area of your life. There are several budgeting plans to choose from, including:
- 50/30/20. This is a simple method that helps you budget your money by splitting it into three categories. 50% of your income should go towards your needs, including your rent, mortgage, food, or child care. Next, 30% of your income should go towards the things you want, including travel, dining out, or shopping. Finally, 20% of your income should go towards financial goals, which could include debt repayment,
- Envelope system. This method is also known as “cash stuffing” and uses envelopes to represent different spend categories like rent, groceries, and savings. Then you put the amount you’ve budgeted into each envelope. When the envelope is empty, that’s it for the month. While this is typically done using cash, there are now budgeting apps and digital solutions that use this method.
- Zero-based. With this method, you allocate every dollar in your budget toward expenses, savings, or debt repayment. The goal is for your expenses to use every dollar you bring in for the month. This way, every dollar has a job and is accounted for.
5. Choose a debt repayment strategy
Next, select a debt repayment strategy to help you stay focused. Two of the most popular strategies include:
- Debt snowball. Using this strategy, you focus on paying your smallest debt first, while making your minimum payments on all other debts. You don’t worry about the interest rate. Once your smallest debt is paid, you move on to the next one. This strategy can help you stay motivated by having a win early on in the debt repayment process.
- Debt avalanche. With this strategy, you pay your highest interest debt first while making minimum payments on all others. Once you pay off the highest interest debt, you move on to the next, working your way down to the lowest interest debt. This method allows you to save the most money over time by eliminating your highest interest debts first.
6. Monitor your progress
To help stay on track, monitor your progress. You can do this using a budgeting app where you can track your spending, saving, and debt repayment. You can also use an Excel spreadsheet or a paper-based budgeting tool. We have put together some monthly budgeting templates that you can check out to see if one works for you.
7. Make updates
If your financial situation changes and you start making more money or you encounter a financial setback, you may need to adjust your budget. That’s okay. This is all part of the budgeting process.
How to Stick to Your Budget
Creating and sticking to a budget takes work. What can you do to increase your chances of sticking to your budget? Check out the following budgeting tips.
- Be ambitious, but realistic. You want to set lofty debt repayment or savings goals, but you also need to be realistic. Setting goals that are too extreme to reach can lead to failure and giving up on the entire budgeting process.
- Set SMART financial goals. You may have heard the saying, “a goal without a dream.” If you want to stick to your budget and other financial goals, create SMART goals – Specific, Measurable, Achievable, Relevant, and Timely.
- Automate your bill payments. Simplify your finances and never miss another bill payment by automating your bills. You can also automate your savings through automatic transfer to ensure you stay on track.
- Celebrate your wins. Debt repayment isn’t easy. It takes a lot of discipline and hard work. So, when you pay off a credit card or make progress towards your debt, celebrate your wins. Acknowledging your success can help you stay motivated for the long term.
When a Budget Isn’t Enough: Speak to a Licensed Insolvency Trustee
If you’ve created a household budget and stuck with it, but it isn’t enough to eliminate your debt, consider speaking to a Licensed Insolvency Trustee. Trustees are debt professionals with access to the widest range of debt solutions, including Consumer Proposals and Bankruptcies.
No matter where you are on your debt journey, a LIT can review your financial situation and help you get on a path towards debt freedom. For a free, no-obligation consultation, call us at 1-888-371-8900 or complete our online contact form. You don’t have to deal with your debt alone; we can help!
