It doesn’t matter how much income you earn or how disciplined your spending habits are if you are drowning in debt. Without adequate budgeting, what seems like a sound investment can turn into an obstacle to financial freedom. Monthly payments for housing, transportation, and education can absorb your paycheck, leaving little for medical bills, groceries, and other necessary purchases, and many are forced to use credit cards with high interest fees. Forget entertainment and leisure: This cycle of accumulation can soon turn into an unmanageable mountain of debt.
Climb Your Mountain and Reduce It to Rubble
You may have heard of The Debt Snowball, a debt-crushing technique popularized by businessman and debt guru Dave Ramsey. This method may seem overwhelming at first, but once you climb your mountain, break down its components, and commit to maintaining a budget, you will soon be riding that snowball to the ground, reducing your mountain into bits.
How to Dissect Your Debt
First, you need to create a list of all your debt, arranged from smallest to largest total balance. This list should also include monthly minimum payments. Next, focus on paying off the smallest debt you have, regardless of interest rate. This debt should be your priority, using any extra money you have within your budget toward creating a zero balance. Once you have paid off this debt, use the monthly minimum payment (and any additional funds) to pay off the next smallest debt you have. This step-by-step process will soon turn that hand-sized snowball into a mighty boulder, reducing your mountain in size and power.
How to Create and Commit to a Budget
It’s important to understand the flow of money that goes in and out of your bank account. Start with your regular sources of income. You can create a budget per paycheck, but monthly budgets will be easiest to maintain, because bills are paid this way. Next, list your monthly expenses, including minimum monthly debt payments. Additional expenses include utility and phone bills, memberships and subscriptions, groceries, medicine, entertainment, child and pet care, and anything else you spend money on regularly. The amount of money you spend every month should not be more than your monthly income. If it is, then you will need to adjust your budget by changing the way you spend money. It may be necessary to put less money away into savings or to suspend a membership or service you purchase for a few months.
Once you have a balanced budget, you will want to put any extra money toward your priority debt. The key is to create a Zero-Based Budget. This type of budget ensures that you account for every penny you spend. If there is money left over after accounting for all monthly spending, you should use that money to add weight to your debt snowball.
Creating a budget may seem overwhelming, but many online tools and mobile applications exist for your use. You can also use simple spreadsheets, like Excel or Google Sheets, and of course, most banks provide budgeting tools for their customers.
Once you have eliminated your debt (at least everything but the mortgage), you can increase your purchasing power and live the lifestyle of your choice. Debt creates obligations and obstacles. Debt-free living creates independence and the freedom to journey anywhere you want to go. Contact us for guidance and more information about how to reduce your anxiety and stress surrounding debt and find financial freedom.