If you don’t have a realistic budget then any effort to get out of debt will be in vain;
You cannot get control over your finances without firstly, understanding your position and secondly, using that understanding to make your money go further.
A budget will also give you a really clear picture on whether you’re spending more than you can truly afford to. For instance, some people may find that their entire month’s salary isn’t enough to pay off all of their living expenses and debts which is an obvious indication that they’ve lost control.
If this is the case, you’re first priority should be to contact all your creditors and arrange less strenuous payment plans that you can actually cope with.
Create a list of realistic goals
It is advisable to create a list of goals, starting with the short-term ones like; pay off both of my credit cards and increase my emergency savings by 10% by March.
You can then proceed to make a list of long term goals such as, to pay of all my debts apart from my mortgage and car loan and have 6 months worth of living expenses in my emergency fund.
Create a list of monthly expenses
Once you’ve done this you need to list all of your monthly essential and non-essential expenses and then review them to see where you can make some adjustments. If you spend a lot of money on purchasing clothes, eating out or entertainment you should cut these non-essential items out so you can free-up some money.
This money should then be used to pay off the debts in order that they appear on your debt priority list.
If you find that you have a surplus after adjusting expenses to meet your new financial goals, this money should then be used to over-pay some of the high interest debts. This will ensure that you can repay them faster and, if nothing else minimise the damage to your pockets.
If however, you do not have an emergency fund, any extra money that you may have must be put into your emergency fund. Use the debt priority list to ensure that you don’t forget including any of the repayments into your expenses column.
A good budget will always be a realistic one
Don’t cut out all of your usual non-essential expenses out completely as you’ll just end up breaking your budget which will only serve to discourage you. On the other hand, if you spend less than you estimated you can use this surplus to make extra payments towards your debts or to add to your emergency fund, as discussed above.
If you’re having trouble working out a budget then you should contact a budget advisor who will be able to help you every step of the way.
The best place to search for one is with the Citizens Advice Bureau or the New Zealand Federation of Family Budgeting Services; these organisations are non-profit, reliable and have the expertise to provide effective and efficient assistance.