We need to understand early in our lives that creating a budget will set a solid foundation for our finances. Besides helping us with our spending decisions, sticking to a budget also gives us an understanding of how much money goes in and out of our accounts or wallets every month.
Looking closely at your budget can also help you find ways to cut unnecessary expenses and use the extra cash to pay off your debts fast.
How You Can Create a Budget To Pay Off Your Debts
The 50/30/20 method is a common strategy most people use in managing their finances. Under this method, 50% of your monthly income would go to essential expenses such as housing. The 30% would go to wants, and the 20% would be for your savings and debt repayments.
Since you’ll be focused on paying off your debts fast, transferring the 30% or a portion of it to debt repayments is recommended. Doing so will help you eliminate your debt faster and will also help you save on interest.
Below are the steps you should take when it comes to applying the 50/30/20 method:
- Put your monthly income on the paper minus the taxes to know how much money you have to work with;
- Write down all the variables and fixed expenses every month. It may include meal outs, groceries, utilities, insurance, debts, etc.
- After listing all of your expenses, divide them into three sections. It should be categorized into necessities, nonessential expenses or wants, and savings/debt repayments.
- Once you’ve created a budget, you’ll need to stick to it for it to work.
Benefits of Budgeting When Paying Off Debt
Creating a budget and sticking to it has multiple benefits, especially if your goal is to pay off debts fast. They are the following:
- A budget can help you understand where your money is going monthly, which can help you determine your spending patterns and know areas where you can cut back on expenses.
- It can help you know how much of your monthly income you can set aside for debt repayment.
- It can give you an idea of how much funds you can put into an emergency fund, which can be critical for eliminating debt so that you don’t get additional debt if unexpected or emergency expenses arise.
Other Ways to Pay Off Debt
Besides following your budget, you can also consider other ways to pay off your debt fast. Below are some of the strategies you might want to consider:
Streamlining your finances is one of the parts of handling your budget, and debt consolidation is a way that can help you out.
One of the many CreditNinja loan options can help you consolidate high-interest debts. It means you’ll be able to transform multiple debts into one, typically with an even lower interest rate than all of your current debts combined.
The debt snowball is a debt repaying method that will guide you to make minimum payments for all of your existing debts. However, the debts with the smallest balance will be considered a priority, so you’ll need to pay extra for this debt type.
After you have paid off your smallest debts, you can then proceed to pay the bigger ones until you can successfully eliminate all of your debts.
Like the debt snowball, the debt avalanche method suggests you pay the minimum on all your debts. However, it recommends putting extra money into debt with the highest interest rates. Once that loan is taken care of, you move on to pay off the debt with the second-highest interest rate until you get rid of all of your loans.
Credit Card Balance Transfer
You can use the card to pay off existing credit card debts if you’re eligible for a credit card balance transfer with an introductory offer of a 0% annual percentage rate (APR). You will need to transfer your current credit card’s balances to your new card and pay off your debts at 0% APR (until the promo ends).
Furthermore, it would be best to take note of fees that might come along with this debt repayment option, like balance transfer fees and others.
Refinancing is also an option that might help you reduce the interest rates on your existing debts. Most of the time, it’s used for debts such as mortgages, car loans, and student loans. This option can help you pay your debts quickly by putting more money on the principal loan than the interest rates.
To Wrap It Up
When you know how to budget your finances and stick to them, paying off debt will become a piece of cake. Through budgeting, you’ll be able to determine a monthly financial goal and find some ways to free up cash to pay back debts you owe. Having a budget can help you focus on debt repayment without disregarding or ignoring other vital financial priorities.