Debt: the elephant in your budget.
It can make it hard on relationships, hard to save funds and it is a waste of your income.
So, how do you tame and beat it? The first thing to do is to figure out if your debt is good debt or poor debt.
Good debt is debt that will create income in the future. It also has to be a reasonable amount. Good debt is buying a car to get around in providing the payments are very low. Bad debt is buying a car that has all the bells and whistles and cost way too much per month.
Make sure that good and bad debt is understood before even going into debt. see more.
Once you understand good and bad debt you need to make a plan to get rid of or reduce the debt. There is only one simple way to start with and that is to get control of your finances. To control your finances you should start with by taking stock of what you have and what you want. What you want will be made up of what you need more then what you want and be very realistic.
Then you will have to create a budget.
The budget must start off being real. It must include a real plan to reduce debt first and foremost. What you really need will be secondary.
It must be remembered that each major category of costs will have some fixed, variable and discretionary charges. Each charge may even be some of all three. An example is cable/internet/phone bills. You need them but you don't need to have the most expensive features. In order to reduce debt, all of the expenses should be looked at and see if anything can be deleted at least temporarily or get a cheaper version. You will also have to change the spending mentality. That could be very difficult but it must be done.
- Don't buy things just because the neighbors have something
- Don't buy things just because they are on sale.
- Get rid of the credit cards if necessary
- Shop with a coconscious friend
- check the internet for ideas to save money, there are lots of ways and some might work for your situation
The budget must show all of your debt and how much you pay towards it each month. If you pay varying amounts then put in an average of the last few months.
Then list all of the savings. Don't quit saving but maybe put some savings on hold or reduce them somewhat. But don't get rid of them. They are there for a reason.
The budget must then list all of the fixed items such as rent/mortgage, insurance, taxes, electrical, telephone, internet, water, fuel costs. You aren't too likely to get much savings out of these but check them out. There may be some better deals to reduce expenses. These should usually be set up for an average monthly charge. It is easier to budget that way.
Then list all of the variable cost items such as food, clothing, grooming, health and transportation. This is where you can likely make some savings. You don't usually need expensive clothes, there are places that have good choices without the high prices.
Finally, list the more discretionary costs such as entertainment, gifts, trips, donations, renovations and, big ticket items. This is where the biggest savings can be made, especially if there hasn't been an effort to reduce expenses.
All categories must be thoroughly examined. It is likely that every category has a few things that can be trimmed somewhat depending on the need to reduce debt.
Getting back to your wants or existing saving, the main savings must be an emergency fund and a retirement fund. Every person/family runs into real emergencies and most people will live to retirement. Other 'wants' will last. Emergency Funds usually pay their way by solving the emergency costs and they also save the budget from going into debt. As for Retirement, it may be a long ways off, but saving something for a long time (and getting some investment returns), means that savings generally grow much better. In other words, let the investment market help grow your funds. Other items simply aren't as important as these two savings.
What to do with the savings you've created
- If you do have excess debt, then hopefully you will have created some excess cash that can be used to reduce and delete your debt.
- If you don't have debt then you will have some funds to put into an Emergency Fund and something for retirement.
- And then if there is more left over it can be saved for something fun.