Why Do I Need a Budget for Debt Management?
A debt management plan/program is meant to get debt under
control once and for all. Getting out of debt is one thing.
Staying out of debt is another. In order to avoid making the same mistakes
twice, you need to learn new ways of looking at your money and how you handle it.
In other words, you need to create and stick to a personal budget.
Get To Work Now to Set Up a Debt Management Plan
Here's the best debt management tip you'll ever receive:
Setting up a budget isn’t easy, but it can be the single most important step to
finally gaining control of your financial life. So suck it up, set aside a weekend and do it!
The following steps to a debt management plan should show you how:
- Determining your income
- Determining your expenses
- Comparing income to expenses
- Setting your priorities
- Trimming the fat and finding alternatives
Debt Management Plan Step 1: Determine Your Income
This first debt management solution step is usually the easiest one.
Simply add up all the money that reliably comes in each month for you to live on. Include all
income from jobs, any alimony or child support and dividend or investment income; add it up and
you’ll have a monthly figure to work with. If your investment income fluctuates, go with a lower
figure rather than a higher one -- you can't count on things going well every month when
you're designing a budget.
Debt Management Plan Step 2: Determine Your Expenses
This step may cause you and your debt management plan/program to go into shock.
It's okay; you'll get over it. While counting up how much money you’re earning is easy,
counting how much money you’re spending every month might send you into sticker shock. However,
it is essential to know and understand exactly what you’re spending. So pull out your checkbook and
review at least the past three months to get an accurate picture of your monthly expenses.
Your debt management plan should start with your rent or mortgage and any vehicle
payments you have. Average your monthly utility bills, auto insurance costs, health insurance,
life insurance and home owner's or renter's insurance and add those in. Also include a month's
average expenditures for gasoline and other expenses like alimony or child support, past due taxes,
membership dues, newspaper subscriptions, cable TV, telephone bills (averaged out) and any other monthly bills you might have.
Continuing with your
debt management plan,
add in your average monthly expenditures for groceries, those quick stops for coffee and donuts or a Slurpee and all meals eaten in restaurants. Add in other entertainment like movies -- including popcorn and candy -- movie rentals, etc. Review your ATM receipts and you may be surprised at how much cash you've withdrawn that you can't account for.
Debt Management Plan Step 3: Compare Your Income To Your Expenses
You should now have two figures in front of you that will guide your
debt management plan - one for your monthly income, another for your monthly
expenses. Which is bigger? If your monthly income is less than your expenses, you are not alone.
Many people are surprised to discover that they are actually spending more than they make every
month. If you aren't, you're ahead of the game, but a budget can still help you
improve things so that you can begin saving money for a nest egg.
Debt Management Plan Step 4: Set Your Priorities
Your debt management plan
now has a solid framework. You've itemized everything
you spend money on and you are aware of where the money is going. Now it’s time to look at what you
have to spend, decide what is most important to you and eliminate what isn't.
Obvious budget priorities include food, shelter and transportation.
But once those are taken care of, what else do you need to spend your money on and what can you do
without?
Debt Management Plan Necessity: Savings
No debt counseling session would be complete without stating the obvious:
The first priority of your debt management plan once your basic needs are met
should be to save money. Always. Take $50 or $100 at the beginning of each month, put it in a
savings account and vow not to touch it. This is a far more effective
debt management solution than waiting until the end of the month to save whatever
is left over and more often than not finding that there is nothing left to save. If you save the
money first, it becomes easier to say "no" to that new video game or dinner out. Once the money is
"gone," you can't spend it.
Once you’ve added a commitment to saving to your
debt management plan, it’s
time to determine your other priorities. Ask yourself these questions before making any purchase:
- Will this still be valuable to me in a year?
- Will this benefit my whole family?
- Does this increase my financial value in any way?
- Is it important to my happiness?
- Does it fill a real need that I have?
Debt Management Plans are All About Making Choices
Your debt management plan/program
will force you to make choices.
If you belong to more than one bowling league, golf league or club sport, prioritize which is most
enjoyable to you. Decide upon one activity that gives you the most pleasure and consider it an
investment in yourself. Make sure you set aside all of the dues and fees you would have spent on
the others, though, and put them in savings. Don't spend them! Prioritizing in your
debt management plan includes redirecting the saved money into the proper channels.
Prioritizing As Part of Your Debt Management Plans
Debt management
requires you to prioritize. Items like entertainment expenses
can also be prioritized. If you are paying a hefty fee for premium cable or satellite channels and
going to the movies every weekend, you are probably paying too much for entertainment. Either
cut out the movie theater visits or downgrade your television service to the basics. Put the rest
of the money into savings or into expenses for items you can’t live without.
Your debt management plan requires you to consider your family when making
choices and prioritizing. Children who belong to every club and sports league in town may have to
choose which activities are most important to them. Older children can work part-time to help pay
for their own activities. Teaching children important lessons about finances and the dangers of
reckless spending now will not only help you with your budget,
it will help them avoid debt later in life.
Debt Management Plan Step 5: Trim the Fat and Find Alternatives
This is the most creative step in
budgeting for debt management and can
actually be a lot of fun. Trimming the fat means taking expenses that you know you must or want to
keep and finding ways to make them more affordable. For example, you need a car to get to work,
but do you really need a luxury SUV that uses more gas and has a higher monthly payment than a sedan?
You know automobile insurance will be part of your
debt management plan, but costs
can vary widely depending upon the kind of coverage you have. Contact your agent and discuss the
type of coverage you're carrying. Consider raising your deductible and asking about available
discounts.
More Tips to a Successful Debt Management Plan
Lowering Your Utility Bills - Utility bills can be expensive, but simple money-saving steps
will make a big difference. You can save as much as 10% a year on your gas bill if you set your
thermostat two degrees lower in the wintertime. Try turning the thermostat down to 65 degrees when you go to bed at night and when you leave for work in the morning. There's no need to heat the house as much when you're sleeping or when the house is empty.
Cutting Costs On Regular Expenses - Apply this same logic to every item in your
debt management plan
that you consider necessary. Groceries? Use coupons and shop
the sales. Check the flyers in the Sunday paper for specials, stock up on these and freeze them.
Entertainment? Rent movies that have been out for a while rather than new releases and you'll save
a few bucks a month. If you like going out to the movies, consider flip-flopping the
dinner-and-a-movie schedule. Go to a matinee movie at 4:00 and you'll save about $4.00 a ticket.
Visit Lower My Bills for more cost cutting ideas.
Explore new ways to enjoy old favorites, too. If you live for live sports, don't despair if the big league parks don't fit your new debt management plan. Seek out a bush league or frontier league in your area. With tickets around five bucks a seat for general admission, it's bargain entertainment with all the excitement of live sports and none of the parking hassle.
Make Some Extra Money - Finally, finding alternative ways to put more cash in your pocket,
like holding a yard sale or making extra money turning a hobby into extra cash. Remember to
stick to your debt management plan, even when you make extra money.
Put the extra money away, and soon you will be surprised to find that you have a nice little savings account. Meanwhile, you have learned to live well within your means without feeling deprived.
