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The Essential Debt Budget
For anyone living a typical adult life of work, family, and leisure, a budget is critical. It will keep an individual and/or a household from moving into the dangerous waters of too much debt and not enough income to pay for it. Budgeting has not, until recently, been taught in school, and if parents have not conducted this important teaching themselves, most young people sort of float into the world of adult finance and debt without much knowledge and experience.
Without a budget, it is easy to accumulate debt and other financial responsibilities which then become overwhelming. The effect on credit scores, health, and marriages can be devastating. To avoid this pit, every young adult needs to develop the behavior of establishing a budget within which he/she or the household can function, understanding that it is a fluid document which can change as financial situations change.
The Steps in Budget Development
You need to follow some very basic steps in this process as follows:
- 1. Spend one month writing down each and every expenditure you make, from a cup of coffee to your mortgage payment – literally everything.
- 2. Put the expenditures into three columns – luxuries, non-essentials, and essentials. Essentials will most likely be things like rent/mortgage, utilities, groceries, gas, and monthly payments to any creditor. Non-essentials will include items such as a new pair of shoes you wanted but didn’t have to have. Luxuries are those impulse purchases that please you or expensive nights out, etc.
- 3. Add up the essential column first. These expenditures will be with you every month, no matter what. Determine how much is left over after this total is obtained.
- 4. Plan ahead for emergencies. This is best accomplished by putting money aside into a savings or money market account. Most advisors recommend 5%, but if you cannot do that, put away whatever you can. Doing this will allow you to have money when a car repairs or dental bill looms its ugly head. You won’t have to pull out the plastic.
- 5. The money you have left is for the non-essentials and luxuries. Before you take that money and run out to dinner, however, consider that you do want to eliminate your debt. If you truly want to eliminate the debt, then you have to make the painful decision to use the excess to pay down debt.
- 6. Take all of your revolving and credit card debt and list them in the order of amount, starting with the lowest as #1. Resolve to put all excess money on that debt until it is paid in full. When that is accomplished, take that money and add it to your regular monthly payment of #2, and so on.
As your financial circumstances change, the budget will have to be revised. Understand that your budget is fluid. If household income goes up, use any increase to pay on debt. If you get a surprise refund or “windfall,” use it to eliminate debt.
The other important thing in this debt elimination process is to reward yourself. When you get a debt paid off, take some cash and buy something you have been wanting. This will provide the motivation to continue.
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