How-To-Make-A-Budget-To-Pay-Off-Debt-Consumer-Debt-Help

How To Make A Budget To Pay Off Debt

To get out of debt, you’re going to need a plan. Reducing debt can be hard work and you may find that you take a few steps towards it and then a few back again. But clearing your debt is a realistic option if you can stick to a plan and see it through. Here’s some ideas on how to create a budget to pay off debt.

Table of contents:

    Problems With Debt

    According to the Money Charity, the average household in the UK has debt of around £60,000. Debt can build up in all sorts of ways, from credit cards and store cards to utility bills or car payments. What’s true for almost everyone is that large scale debt can cause stress, depression and may even put your home at risk.

    There are several charities and free advice support centres who can help if you are facing this situation. Or, if you can see your debt rising and you want to take action now, the first thing you can try is to create a budget.

    What Is A Debt Budget

    Ultimately, a budget will help you to write down a plan that you can follow. Taking some simple steps will give you a clear way out of your debt. You can start with this calculation:

    Monthly income – Expenses = Surplus/deficit.

    A Debt Budget Example

    For example, imagine your monthly gross salary is £2500.

    But by the time you pay out for rent, utility bills, mobile phone, food and car, you have a surplus of around £200 per month, or around £1600 for the year.

    This may not seem like much, but if you apply it to help pay off you debt over a period of time, you can make a significant contribution to clearing it.

    So if you have debts of £1000 and you can afford to pay £30 towards this per month, you will be debt free within 3 years. It’s much easier to visualise a way out of debt if you have a budget you can stick to.

    How To Reduce Debt With A Budget

    Now you know how much to aim for, how should the money be allocated?

    Let’s get started with some ideas for a budget.

    Income

    The first step is to look at what money is coming in to your account. Write down all your household income, if there’s just you, or both with a partner. This is not just your wages, but any benefits and pensions as well. Perhaps you have shares which have monetary value too. As well as this, you can add any child benefits you may receive.

    Expenses

    Step 2 of how to make a budget to pay off debt is to list all your monthly expenses. These might include;

    • Rent or Mortgage payments
    • Utilities such as Gas, Electricity, Water
    • Car payments and petrol
    • Food and Dining out
    • Mobile phone, TV licence, Netflix or Sky, gaming payments
    • Entertainment
    • School payments
    • Memberships such as Gym
    • Birthday presents, even an estimation will do

    Your next list is one that you spend money on only once or twice a year, such as car insurance and Christmas presents. Or maybe you have occasional check ups at the vets, opticians or dentist to pay for. On this list, add up all these expenses together, then divide the total by 12.

    So perhaps you spend around £500 on your occasional list. £500 divided by 12 = £41.66. Then add that amount to your monthly total.

    For example: £1500 + £41.66 = £1541.66 each month.

    Estimating Your Expenses

    Knowing how to make a budget to pay off debt is a great start, but sometimes it can be tricky to get right. Perhaps you’re not sure how much you spend on things like food, petrol or entertainment. Start with your best guess and work from there.

    A good idea is to track your spending for a couple of months. So write down every time you spend money on food, even snacks or extra items for two or three months. Do the same every time you go out, for the cinema, restaurant, pub or nightclub. Include any taxi or bus fares and spending on food and drink. Next, write down anything you spend on shopping, clothes, shoes, hair cuts, nails or electronic devices.

    The aim of doing this is to give you an idea of exactly where your money is going. Sometimes it can really make you think.

    Ideally, it will also become clear as to where you can cut back on your spending, in order to put some money away to clear your debts.

    What’s Left

    Now you have your income and expenses. The next calculation is to take your outgoings away from your incomings.

    For example, you earn £2500 per month. Your outgoings are £2200 per month. Which leaves you with only £300 per month. So if this doesn’t seem enough to be able to clear your debt, you need to seriously look at ways of cutting down your expenses to free up more money.

    Perhaps you don’t need gym membership and you can find a way to keep fit for free. Or maybe you don’t need to buy new clothes this month and you can set that money aside. Perhaps you can challenge yourself to go without takeaways for a month and see how much money that saves.

    Prioritise Debt

    To conclude, now you know how to make a budget to pay off debt, you’ll see that even setting £10 a month aside will help to clear it.  But it may take a while this way. A final list to help you it to make one of your debts.

    In this example, we are assuming that you have included your essential debt payments such as rent, gas, electricity, water and food in your expenses already.

    Now write down what other debts you have. Examples include store cards, credit cards, car payments, student loans or personal loans. So you can follow this example:

    • Name of Debt: Car payment
    • How much you owe: £3000
    • Minimum payment: £30 per month
    • Monthly payments left: 100
    • Interest rate: 16%

    How you prioritise your debts depends on what you can pay each month. Paying off a minimum amount will take a longer period of time and you may end up paying a lot more money. However, debts with a higher interest rate build up a lot more interest. Hence you may choose to pay these off first as quickly as you can, and debts with a lower interest rate with the minimum amounts.

    Remember, it’s important not to default on any payments, so even if you can only pay a small amount each month, that’s better than avoiding it altogether.

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