Starting a Budget While in Debt: The Ultimate Guide

A budget is a path toward financial freedom. It’s the key to your dream life. However, due to ignorance and false myths about how hard budgeting is, many people have drowned in debts due to poor life decisions.

On the other hand, debts aren’t permanent. With a clear plan, you can always achieve a debt-free life, even if you live from one paycheck to the next.

Here’s how a budget can offer you a one-way ticket to financial freedom.

1. What is Your Debt Situation?

This is where you list all your debts to get a clearer picture of your financial situation. Apart from understanding your financial situation, listing your debts will allow you to tailor a personal payment plan that fits your budget.

There’s also the debt to income ratio which will can be a vital indicator of your financial health. If the ratio is low, then you’re healthy. Anything above 10 percent should worry you because realistic loans lenders may turn down a loan application.

2. List Your Income Sources

To understand your financial situation, the first step is to list your income sources. How much money do you earn per month?

Why should you list all income sources?

By listing your income sources, you’ll know the fixed amount of money you can work with every month. This means you cannot spend a dime more than the listed amount unless you are willing to sink deeper into debt.

3. List the Essential Expenses

After knowing how much you earn every month, the next step is to make a list of your essential expenses, in short, your obligations.

Such obligations include household utilities, rent, car payment, cell phone bills, mortgage, groceries, insurance, and child support among others.

Note that this category should include what you cannot do without, your primary expenses. Thus, expenses such as cable TV shouldn’t be on this list. They’ll come a bit later in the process.

4. Analyze Your Spending Habits

Creating a budget requires you to be realistic about your financial situation if you’re serious about turning it around. For example, if you budget $100 for entertainment every month but spend 3 times that amount, chances are you’ll run out of money a few months into the budget.

This calls for a serious sit-down with yourself to analyze your spending habits. From there, you can find ways to cut down unnecessary expenses. This involves going through your credit card and bank statements and other receipts to create a paper trail which can help you create a true spending picture.

5. List the Non-Essential Expenses

It’s about that time. After analyzing your necessary spending demands, it’s time to list the non-essential expenses. These are products and services you can do without. Note that this process is all about listing, not trimming. This is what your list may look like:

  • Toiletries
  • Fuel
  • Gym subscription
  • Entertainment
  • Health expenses
  • Dining out’

6. Put Your Budget Together

Now that you have a list of all types of expenses and the amount of money you earn each month, it’s time to craft a budget. It’s plain and simple, no algebra or any other mathematics you used to hate in high school.

It’s a description of the expense and the amount you expect to spend on it. You can do this on a plain paper, a computer, or a mobile app. First off, start with your total income amount followed by all your expenses and the expected amount for each item.

  • Your income – $5,000
  • Childcare – $300
  • Rent – $1,000
  • Student loans – $400
  • Electricity – $150
  • Groceries – $350
  • Credit card – $100

Do the same for your non-essential expenses and remember to be honest with your spending habits. After doing this, go through the entire list to see whether there’re areas you can trim. After trimming your budget, list the revised numbers.

After listing all items, add them up. How much do you spend every month? Is it more than your income? If yes, then you’ll have to revisit your expenses again to find additional areas you can trim.

7. Should I Have $$ Left Over and How Much?

Indeed, you should have some money left over after clearing all your expenses. In fact, financial advisors recommend having a 20 percent buffer between your income and expenses. For example, if you earn $5,000 each month, 20 percent is $1,000.

You can use this money to start an emergency fund. The money can also come in handy when accelerating your debt clearance. However, this can be a challenge for many Americans, especially when a huge percentage live from one paycheck to the next, but it should a goal to aim for.

8. What if I Don’t Have any Left Over?

One, this means you’re living from one paycheck to the next. Two, the only way out is to cut back on your spending if you fancy a debt-free life; otherwise, you’ll be in a lifelong rat race. For example, is Netflix a necessity? Instead of eating out, how about cooking at home?

The other way out is to earn more money. Before getting a side job, analyze your situation. Do you have an 8-5 job that takes up a lot of time—even past office hours? What skills do you have to leverage in the market? Alternatively, you can seek a higher-paying job if you won’t have the time for your side hustle.

9. Set Aside an Emergency Fund

Many people often overlook this simple but lifesaving financial aspect of life. By setting aside an emergency fund, you save yourself from future debts. To start saving for this fund, open an emergency savings account.

It’s impossible to predict the future. However, what you can do is prepare for it. In the event that you lose your job or fall sick with massive medical bills to clear, you’ll have an emergency fund to tap into. This will safeguard your finances from rapid and total collapse.

Before you can start clearing your debts, take the time to set up an emergency fund. Start small. For example, one-month worth of living expenses and then work your way up to two. Remember the leftover you created after trimming your expenses? Well, this is the right spot to stash it.

If you find it difficult to set aside money for your emergency fund, employ an automatic transfer technique to ease the process.

There you have it: How to start a budget when in debt. However, keep in mind that this isn’t a one-time affair. You must look at your budget every month carefully to check on your spending habits. For sure, this month will be different from the next, so you’ll have the liberty to adjust the figures to suit the situation. Make sure that you’re improving!

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