Guest post by Andy Masaki
Your finance is in your hands. The way you manipulate it, your finance will work in that manner and mechanism.
If you take it casually and don’t quite bother about how much of your income you are spending per month, how much you are saving, then your finances will never be under your control!
And you know what? When finances are not under your control, you might fall prey to the debt trap!
So, if you can keep a follow up on your income and expenses, then your finances will obey you, just like the way you want!
This is what brings us to discuss this topic! Here, we will be discussing monthly budgeting techniques and how they are effective in getting a handle or grip on your debts!
Well, I am not saying that you can’t do that without a budget! You can become strict about your finances, start to regulate your expenses, and measure every penny going in or out. But nothing can serve you better than a well-organized budget chart!
So, let’s start!
You can surely start off with the envelope budget:
This budget plan is plain and simple. But it has the power to make proper arrangements for the way your income is to be divided. And most importantly, how your finance is to be designed!
We all have broad expense categories. An envelope budget can help you to separate these coagulations of expenses, and giving rightful importance to them, based on your income and financial situation.
All you have to do is make separate arrangements for the different categories. And stash money to each of those types as per your requirement and convenience.
For example, every month, you are putting in
- $1000 for groceries
- $500 for transportation costs
- $1000 for your debt payments
You can very well adjust your expense amounts and manipulate or govern your expense list by building separate envelopes. That’s why the name is envelope budgeting!
But, in recent times, it’s more convenient to have separate accounts for all your major expense types. And you can do the required transactions from these accounts accordingly.
Always remember, if you exhaust any one account or envelope, then you cannot replenish it, until and unless you get your next paycheck!
How will an envelope budget help you with debts?
Using the envelope budget means that you CAN’T refill your expense accounts whenever you feel like it!
So, it’s more or less, building walls and blocks for your expense hand! You are setting a fixed amount for the debt payments. You need to be dedicated to paying off your debts and maintaining a balance among your other expenses as well.
Next is the percentage budget:
This budget is an infusion of old school 50-20-30 and the envelope budget.
Here, you will work with percentages and have a look at the approximation factor. So, you would be calculating how much is an expense type eating up your income per month.
But, the expense type has a way broader shape in percentage budget, than that of the envelope system. As I said, it is a mixture of 50-20-30, and envelope budgeting methods. That means:
- 50% of your income is meant for your needs
- 20% is put down to your savings
- 30% is for your luxury expenses
Hence, with a percentage budget, you are going to use the expense type format as in an envelope system, but use the percentage form of 50-20-30.
You can definitely question why is percentage budget different from the other two? The answer is, the flexibility offered by a percentage budget!
This is a how percentage budget eases out your debt payments:
Having debts means most likely, a substantial amount of your paycheck gets deducted to your debt payments. That’s why you NEED to pay off your debts to lead a debt-free life ahead!
So, I would suggest you list debt payments under the needs category in your budget.
You can keep aside a substantial amount for your debt payments as “needs” consist of 50% of your income!
Apart from debt payments, groceries, utility bills, insurance, etc. come under your needs. But you should try to put in dollars as much as possible for your debt payments.
Joy’s Note: At The Cafe Scholar, I recommend the envelope system, or doing something similar with an app like Everydollar. A percentage budget may not allow you to get nitty-gritty enough to tell your money where to go. I would also say that while you’re getting out of debt, you should cut that “luxury” percentage way down. But looking at percentages can be a great way to set goals for yourself. For example, you could decide that you want 25% or 40% (or choose your own number) of your income to go towards debt payoff, which would force you to be choosy about the amounts you set for other lines in your budget.
How to pay off debts more efficiently on top of having a budget?
Debts become cumbersome to pay off as they not only consist of the original principal amount. But also many other charges and fees, most notably the interest charges are added to your principal balance!
That’s why it’s not always possible to clear your debts only based on a budget! You need to practice some good habits as well, like not using any credit card, establishing an emergency fund, etc.
But whatever you do, you should keep your calm and be patient! Trust me, buddy. it takes time to pay off your debts. You can’t expect to see them go away within a flash!
Wish you all the best in your debt-free journey!
Andy is a blogger at Penny Less Dad and financial writer associated with the debt law firm. He is a debt expert and a member of several online forums where he shares his advice as well as tips to lead a financially independent life. You can learn more about Andy Masaki at www.PennyLessDad.com.