On July 25, I talked about the first part of Our Debt Reduction Plan. This time, you will learn more about the part 2. Hope it will be helpful for all of you.
6. Create a realistic budget from the information that you have gathered. List your income on one side of the page and your variable and flexible expenses on the other. For many people you may find that you have been overspending each month. If so, you will need to cut back in your flexible expense category in order to balance your budget and to “find” extra money to put towards debt and savings.
Yes, you need to make sure that you are putting some money in savings each month for those unexpected expenses that you had been putting on your credit card. Examples of this would be putting car repairs on your credit card. You don’t want to add to debt, when you are trying to pay off debt.
Take a good look at your flexible expenses and see where you can cut back. I would suggest looking at the amount of money you spend on groceries and eating out. If you are eating out a lot, you will need to make a lifestyle change. You can still eat out, but not as often and only when you find a coupon or a great deal at a restaurant. As to groceries, I recommend making up a meal plan based on the grocery sales flyers. Also, use those coupons for items that you normally purchase. Are you spending a lot on gasoline and could possibly cut back by consolidating your errands or by biking or walking? Can you get a better cell phone plan or internet service plan?
If you still need to find more money in your budget you may need to make some drastic decisions with your budget. What do I mean by drastic? Well, for most people cablevision is a necessity but the reality is that it really isn’t. Yes, at this point you really need to take a hard look at what is a want and what is a need.
You must ask yourself a simple question, do I want to be debt free or do I want to watch t.v.? You don’t have to give it up for the rest of your life, but you may have to give it up until you meet your financial goals.
What about a gym membership? You can live without it. Ride your bike or take long walks. What about eating lunch in a restaurant every day? Take leftovers or sandwiches to work. You will probably lose weight at the same time. Are you renting a lot of movies? Start borrowing movies from the library for free instead.
How much money should you find to put towards debt? This will depend on your individual situation. For some people you will find a few hundred dollars after reducing your spending. For some single people, it may be $50. That’s okay as you will be paying far more on your debt than you were paying before.
7. Find the debt that has the smallest balance due. The only exception to this would be if you have a pay day loan. I have never had one of those loans but the interest rates are extremely high – almost to the point of loan sharking. So if you have a pay day loan, that will be your top priority to pay off first.
Our debt with the lowest balance was a credit card with a balance of $800 on it. The minimum payment was $15. We had not been paying the minimum payment but had been paying $100 a month on this credit card. I knew that I wanted to get that paid off as fast as possible but I also knew that I wanted to get money in savings at the same time. By going through steps 1 through 6 we determined that we could cut back and put an additional $300 a month on this debt. We also determined that we could put $100 in savings per month at the same time. Yes, by cutting back on groceries and eating out, by being careful with our money and not making those $50 trips to Wal-mart for totally unnecessary items, not making any clothing purchases and doing other cutting back tactics, we freed up an extra $400 a month. (Remember we had been paying $100 on this debt, we found another $300 in our budget to add to this debt payment plus another $100 in our budget to put into savings.:)
8. When you pay off one debt, apply the payment amount to the next debt. After a couple of months the $800 balance on the credit card was paid off and we then took that $400 and applied it to the next lowest balance debt which was another credit card. The amount we had been paying on the second credit card was $200 so we were now paying $600 on that debt. This is called a snowballing effect. Continue to pay off a debt and then take the monthly payment you were paying on the paid off debt and apply it to the next lowest balance debt.
Stay tuned for the last part–Part 3 in this series coming soon. 🙂