Eliminate Debt with a Budget

Debt elimination can help you get out of debt, and a budget will help you stay out. We'll talk about basic budgeting strategies here.

Importance of a Budget

One of the most common reasons consumers get into trouble with debt is that they are not conscious of where their money goes. The money is gone as soon as it comes in, and you have no idea where it all went. A budget is the answer to this problem. Budgeting and debt elimination go hand in hand because using them together is the most effective way to get and stay out of debt. A budget will help you identify where you're spending your money, which will give you an idea of where your debt is coming from. Once you identify these spending leaks, you can free up cash to devote toward eliminating debt. The overarching goal of a budget is to minimize spending so you don't compound your debt problems and to free up funds to pay down debt as much as possible. The more money you free up in your budget, the easier it will be to make your debt elimination payments.

Tracking

Write down everything you spend for one month in order to keep track of your expenses. One way to do this is to keep your ATM withdrawal receipts and then deduct all of your purchases from the balance until your money is gone. Also keep receipts from credit card transactions and deduct these as well. In addition, you'll need to keep a record of the money you have coming in, so hold on to your pay stubs or whatever else you use to document your income.

Summing & Reducing

At the end of your month-long tracking period, add up all of your expenses and split them into two categories: fixed, essential expenses (e.g., rent, food, utilities, etc.) and nonessential expenses (e.g., meals out, entertainment, etc.). Review your nonessential expenses first to pinpoint areas where you can make cutbacks. You can do simple things, such as bring your lunch to work everyday instead of eating out, to save hundreds over the course of the month. Even fixed expenses are not immune to cutbacks. For example, you might be able to lower your transportation costs by carpooling or using public transportation. All of the money you save on cutbacks can go toward your debt elimination payment and savings. As you build your savings and eliminate your debt, you will have less of a need to borrow in the future when you hit financial rough patches.