Creating An Effective Budget and Paying Down Debt

Debt

Creating An Effective Budget

When working on your family budget, there are many things that come into play in creating an effective budget.  Not only should it include your income and expenses, but your values should come into play as well.  If you are planning a new budget or updating a current budget, it is also important that your spouse be a part of that planning.

How do your values come into play?  It is a fact that most of us spend way too much money on things that are not usually necessary.  Then when we have to pay for the necessary items we do not have enough money.  If you put your values to the test, what would be on that list?  For instance, if you had to leave your home in 5 minutes and could never return what would you take with you, what would you regret not taking with your and what would you be happy to leave behind?  You only have one minute to answer each of these questions.

Based on these answers, go back and think about the values represented by your answers.  For instance, if a television were on your list of “happy to leave behind”, then why would you spend $100 a month on cable service?  You want to align your values up with what is important or not important in you and your spouse’s life.

When creating your budget, here is the rule of thumb on the proportions of income:

  • 10% of your income to share (charity)
  • 20% of our income to savings
  • 70% of your income on spend, such as; food, housing, travel, tickets to a play, etc.

Keep in mind that when you are listing your expenses, be sure to list all of them.  This includes essential and non-essential expenses, which means not only mortgage, utilities, and insurance but also clothes shopping, gift purchasing, personal care items, etc.  When you add up all of your expenses vs. all of your income are you coming out lopsided?  Do you have more expenses then you do income?  If so, this is where your values come into play.  Start chipping away at your expenses, by determining items you value versus those that you can do without? Of the expenses that you need, are there any you can cut back on or negotiate for a lower price?

Having a budget cannot only save your sanity, but it can really cut down on some unnecessary arguments with your spouse.  Not being on the same page in a budget has led to many divorces.  Working on a budget together helps to establish not only a bond with your spouse but also creates a level on independence.  Here is a great article on the 10 Ways Budgeting Saved My Marriage.

One thing you should keep in mind while budgeting is that if you have a high level of debt to income then the above proportions of how your money should be spent will not work for you.  The first thing you will want to do is establish an emergency fund of at least $1,000.  Next you will want to start chipping away at your debt.  There are two ways to do this: 1) Pay off the debt highest interest rate first by paying minimum payments on everything but that one.  Throw any extra money you may have towards that bill with the large interest rate.  2) Celebrate the small victories by starting with your smallest balances first.  As you pay off your small balances take the money you had paid on your smaller balances and start applying that t your larger balances.

Debt Snowball Method

Paying your bills off this way is called the Debt Snowball Method.  Here is an example of how it works:

  • $500 credit card (payment of $50 a month)
  • $2,500 medical debt ($63 payment)
  • $7,000 car loan ($135 payment)

Start with paying off the $500 payment first.  Since you found a part-time job to help pay off your debt, you are able to pay-off that $500 in the first month.  Then when you start on the debt for $2,500 you would make your first payment of $613, which is the $500 you are earning plus the $50 you would normally apply towards the $500 balance, plus the $63 minimum you would normally pay.  After four months the medical debt will be paid-in-full, lastly you will tackle the car loan.  Your payments will be $748 a month and your debt will be paid off in nine months!

Having debt can cause a tremendous amount of anxiety.  Paying off your debt allows you the freedom and flexibility to do more of the things you want to do.

Information sourced from Genworth Financial.

 
About the Author

A Mommy blogger who loves working from home while raising her 9-year-old daughter and 5-year-old boy/girl twins with her husband. I have a passion for learning and enjoy anything having to do with the technical side of blogging. I am also always working on self-improvement and being the best mom I can to my children. I am also a bit of a coffee addict! ❤

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