Today I have a special blog for my viewers. It is from someone who shares the same passion to strive to help others with their finances. I am welcoming Andy from www.PennyLessDad.com to share his ideas in this post below. Be sure to check out his site!
Will try to keep this as simple and straightforward as possible!
Debts are tough devils that can only be tackled with proper budgets and debt payment plans. It is up to us however, what budgets shall we choose and what payment plan should we follow.
Definitely your strategies will depend on your debts. But at the end of the day, let me tell you that you can be successful at paying off your debts irrespective of the debt amounts.
If you don’t believe me, then you must have never followed a nice and well planned budget.
First thing’s first, you got to have a budget that can bring your finances in line.
Here are the budgeting strategies you can follow:
1. The zero based budgeting
You might have been hearing about this budget for quite some time now. This budgeting format is currently used by many for analyzing their personal finance.
The budget is usually implemented by industries, corporate and enterprises to evaluate their expenses and income. But many laymen are using it as it has proved to be professional, yet easy to understand.
In zero-based budgeting, your motto is to utilize your total income by making a long list of all the expenses you have for a month!
Now, you can surely ask, what if there comes in any sort of unplanned or emergency expenses then? What will you do?
Probably, that’s exactly where your savings and insurances will come of great help. We can discuss about them probably in some other post.
But first, let me give you a demonstration of zero-based budgeting with an example.
So, for each month you sit down and make a full list of your expenses. Your expenses will definitely include debt payments, and any other bill payments you have to make.
Let’s assume your monthly income is in the average section and somewhere around $4000.
I am making here an example expense list, so that you can understand this well.
1. Transport cost- $500 2. Grocery cost- $1,000 3. Debt payments (includes all your debts both secured and unsecured)- $1,000 4. Electricity bill- $100 5. Other utility bills (if any)- $100 6. Luxury activities (including eating outs, partying, weekend trips, etc)- $700 7. Monthly personal savings- $200
If you add all the expenses then it’s coming to $3,600, total. This means there’s a remaining $400, that is unused from your income.
As per zero-based budgeting, you will have to make, (total income- minus -total expense)=zero.
That’s exactly where the name ‘zero-based’ comes from.
Hence, you will have to continue adding on expenses so that you can make complete use of your income.
If you can’t find any more expenses you can add to your list, then you can sensibly add the unused dollars to your existing expenses.
Say, many add this amount to personal savings, or make extra debt payments or add it to buy a few costly grocery items, and so on.
Add it to anything that won’t be a wastage. It should be meaningful and useful!
2. One step higher, the reverse zero-based budgeting
There’s absolutely no need to freak out by the name of it.
This is just the alter ego of zero-based budgeting. The name has a reverse in it, because, in this one, everything is same as the conventional zero-based budgeting, except you will be prioritizing your expenses, and make it an obligation to fill the highest priority expenses first.
I can pretty much say, that in your case you must be having debt payments as your highest priority.
So, in your expense list, the debt payment section will be at the top number 1 position, and you will input your preferred amount of dollars for it.
You keep on adjusting your other expense numbers, depending on two motives.
One, you must try your best to increase the debt payments for the month.
And, Two, you must ‘zero-base’ the budget, just like above, where income minus expense results in zero.
But, that’s not all. A budget can only help you to keep a track of your cash inflow and outflow. What will you do if your income is too little, or you feel that you are spending too much on unnecessary expenses?
Once you are done with budgeting and you have an amount set for debt payments, you will have to correctly use this amount to pay off your debts.
Now, that’s only possible if you can make up a good debt payment plan.
Go for the conventional debt avalanche, where you make extra payments on the debts that has the highest interest rate.
You will be listing your debts as per the descending order of interest rates, and hit them one by one, till all of them gets paid.
The extra payment can be anything that you can afford.
I very well know that many of you have high debt amounts.
A budget and a payment plan won’t help you much, if the debt payments cover more than 30% of your income. High chances are, you will forever be in deep waters.
In such an instance, imagine if you can reduce your debt amounts to a certain extent, and then pay off the lowered amounts. Things will become so much easier for you. All you have to do is choose the best debt relief option .
Not only this, but also penalty fees will get waved off, and interest rates can also get stripped down, if you go for debt relief.
So, be wise and act fast!