Debt & Personal Budgets
A personal budget can make it all the easier to deal with debt. Setting yourself a clear personal budget will help you understand your finances, better communicate with your creditors, plan for the future and make your money work for you.
Budgeting to reduce your debt and pay off your debt as quickly as possible sounds very difficult. However, living with a strict budget does not mean being unhappy. Cutting down on spending needn't necessarily mean not going out, seeing friends, or enjoying yourself, you just need to carefully plan in order to manage your debt better.
Can a budget really help me beat debt?
Getting down to zero debt is the aim. If you can cut out all unnecessary expenses and save as much money as possible, whilst not taking on any new debt, a budget will show you exactly how to do this.
Budget and the debt you owe
If you owe money to creditors, making a budget will allow you to better understand what you can and cannot offer them in terms of repayments.
How do I budget to beat debt?
In order to complete a comprehensive budget, you should use your bank statements and bills to work out exactly what you are paying out each month, including direct debits and standing orders. Next, work out how much you spend every day on different goods and services, not to mention any extra costs such as hobbies, presents, health bills and holidays. From this, work out your total outgoing for a year, and divide by 52 to get a weekly outgoings budget.
Once you understand your outgoings, work out your income including salary and any benefits. Average out any irregular income. Once you have your outgoings and income you should be able to see how much and where you have a shortfall, if any. At this point, you can decide to cut back on expenditure
Refresh your direct debits
Better managing your debt means saving money wherever you can. If you have a bank account with direct debits coming out every month, check to see whether you need them all. There may be dated subscriptions or payments that you simply don't need to make if you are trying to deal with debt. Furthermore, you may wish to set up more direct debits to lower your monthly outgoing - many companies offer savings for direct debit customers due to lower administration costs.
Cutting down expenses to beat debt
Think of it on a penny by penny basis. Every penny you spend unnecessarily could be used to lower your debt and set you on the path to being debt free, but you shouldn't feel guilty about still wishing to socialise. Budgeting does not mean going on a spending spree, but try to think about ways to spend less on entertainment.
What to do with money you save?
If you have stuck to a successful budget you should have money left over at the end of the month. There are several ways to use this extra money. The first could be to repay a chunk of your debt, if this will help to reduce interest payment and is permitted as part of your repayment plan. The second could be to put this money into a saving account or an investment vehicle such as an ISA, with the aim of saving up to pay off your debt.
Keeping a budget going to avoid debt
Doing a budget once is a great start, but budgets needs to be frequently reviewed in order to keep track of income and expenses. Noting down what you spend and any financial changes for the first few months should give you a clearer picture.