Create a Debt-free Budget
Updated: Aug 3
The first step to financial freedom is making wise choices with your money.
A budget is an overview of your expenses & income. Without it, you will not have a good understanding of where your money is going or how much money you have.
Financial management is crucial in making the most of your income.
Breaking free from debt is a step-by-step process. It begins with knowing how much money you make, save, or spend.
Most people think a budget looks like this:
= Spending Money
That couldn't be farther from the truth if you're trying to get out of debt or get ahead in your finances.
In that case, a budget should look more like this:
- Extra Debt Payments
- Money for Savings
= More Money added to emergency fund
When you have financial goals, you should go a long time without using your money toward exorbitant spending. If you're the kind of person who thinks they have to spend money, then budget how much you allow yourself to spend.
You must know where your money is going each month in order to manage future goals. Keeping track of your spending for the purpose of getting out of debt is easy if you get organized.
You can make a budget using a spreadsheet or an app. You can also get pre-printed forms at your local office store. You can even print off this worksheet below...
Now. There's no excuses for not having a budget.
It isn't as simple as writing down your income minus expenses. You want to get a true snapshot of ALL of your spending.
Go through your bank statements, receipts and anywhere you keep financial records and see how much money you blow on things that are not living expenses.
To create a monthly budget, write down your income. Then deduct all of your living expenses from it such as rent, utilities, and fuel for your car. Whatever you have left after expenses are considered discretionary income.
Discretionary income is important in many situations such as applying for a student loan. However, for the purpose of a monthly budget, you will also want to deduct all of your spending, savings, and recurring purchases from your income as well.
This will show your bottom line and help you to see where you can cut back on some things in order to have more money to put toward paying debts off or saving for an emergency fund.
Remember to add things like eating out, entertainment, and misc. expenses. The easiest way to do this is to pull it from your bank account statements.
How to Manage Savings
Most online banking systems allow you to categorize your bank transactions with labels. You can use those labels to keep up with where the money is going. For instance, you can label a debit charge at a restaurant as 'eating out.'
This type of spending is usually the easiest to control. We can't cut back on our mortgage payment as easily as we can cut back on eating out. Find areas where you can cut back and learn to replace those luxuries with less expensive choices.
Take a salad for lunch instead of eating out. Instead of eating out for dinner, cook at home. Buy generic when you can and use coupons. Go shopping only when necessary. When you get to the store, get what you need and get out before you find things you really don't need.
Don't go shopping for entertainment. Find something else to do. People who are tempted to spend money frivolously should make it a point to avoid shopping, especially online shopping.
Have you ever noticed when you go to the supermarket, you end up coming out of the store with several more items than you intended to buy? Which means you also spent more money than you intended to spend.
It's called impulse buying and it's an intentional setup. Don't fall for it.
The temptation to spend your money is everywhere. The more you shop because you're 'bored,' the more money you will want to spend.
Shopping creates lust of the eyes. This is bad if you have debt to pay.
Stop shopping and replace it with something productive like getting a second job or working out at the gym. You don't have to sit around bored.
Being bored is proof that you are not using your time wisely. Do things that bring health & financial benefits instead of just blowing your money or wasting your time.
The trouble some people have is they don't add all of their spending to their budget. They pay their bills and then throw the rest of their money to the wind. You will never get ahead in your finances with this attitude.
Integrity is doing the right thing, paying everyone you owe, and putting your own lustful desires last.
If you're in debt, or in other words, if you still have a balance left on a debt after you've made your monthly payment, you do NOT yet have gain once your bills are paid for the month.
Your monthly income isn't considered gain until you've paid everyone you owe, in full.
If you have a balance on a debt, your money doesn't belong to you. It belongs to your debtors.
Until your debtors are paid in full, you don't really have spending money.
This is the hardest thing for people to understand, but if you can get it, you can get ahead!
What is debt?
Debt includes any money you owe including to family or friends, past due fees, interest, taxes owed, fines, or anything that would cause a deficit in your income. Debts can be student loans or anything that is considered owed.
In order to become a wise steward of money, you must take into account everything you do with your money and everyone/everything you owe.
The trick to budgeting is to make sure you include things like savings, eating out, entertainment, and any extra expense you normally incur.
If your spending money is budgeted, just like you would budget a bill, you will have much more control over your money overall. Don't forget things like vacations, gifts, and miscellaneous spending.
Budget Your Savings
The best way to budget your savings is to deduct a certain percentage of your income and transfer it to your savings account as soon as you get paid.
This way savings is treated like a bill and gets paid every month without fail.
If you've been using the 7 principles of prosperity in order to get out of debt, then savings should be postponed (after you have an emergency fund in place) until you have reached your goal.
Creating a debt-free budget is imperative if you want to get ahead in your finances. For more tips on budgeting, sign up for my updates.