When it comes to debt, budgets are life.
Before tackling my debt, while good with setting my budget, I wasn’t so great at sticking to it, largely due to temptation- but that’s a post for another day.
If debt freedom is your goal, it is important to set a budget, made as simple and realistic as possible, and spend a few months getting used to it. It took me three months of merely sticking to the budget before I was able to start mastering the art of cutting my expenditure, so for sustainability’s sake, I would recommend starting with a realistic budget based on what you are currently spending as a starting point to debt freedom.
My guide for creating and setting a budget follows. I am paid monthly so work it out on a monthly basis, however, adjust these for your own personal circumstances.
List all sources and amounts of net income (after tax and other deductibles- basically the money deposited to your bank account) and total.
List all sources and amounts of expenditure over the same period. Unfortunately, there is likely to be a little bit more work in this section as it will include the following:
- All direct debits, such as your mortgage/rent, phone bill, gym membership, insurance etc.
- All variable essential expenses, such as groceries, petrol, eating out, entertainment, clothing etc. (you might be shocked by this figure as starting out, it’s usually a lot higher than you first think!)
- All of your minimum debt repayments (not including your mortgage), such as minimum payments for credit cards, car finance, loans, payday loans etc.
- Any savings pots you might have, including Christmas/birthdays, holidays, emergency savings, pension/retirement (although not pension funds that are auto-deducted from your salary, as this won’t be included in your net income figure)
Total up the figures for each category separately, which will come in handy later on down the line as we will work on cutting the variable expenses, upping debt repayments and working on goals/savings. What you should be left with is:
- Total direct debits/bills
- Total variable expenses
- Total monthly minimum debt repayment figure
- Total savings figure
- Total expenditure figure (total of all of the above)
Working Out Your Surplus/Deficit
So once you have your total income and your total expenditure, take away the expenditure from the income; the figure you are left with will give you your surplus/deficit income.
Hopefully here you will have a surplus income, which can be used to build your emergency fund, pay extra off debt or build savings (if you have no debt).
If you are breaking even or have a deficit income, and intend to pay off debt or build savings, you will need to look at ways to reduce your direct debits/bills, your variable expenses and debts in order to finance these.
So there you have it- how to set your budget, which is the easy part! Sticking to it can be more challenging, which is why I suggest starting with what you are currently spending to figure out your current situation, what you need to work on and how to move forward to debt freedom. I am intending with my blog to share all of the details of how I allocate my surplus income to debt, how I’ve nearly halved the cost of my groceries, how I’ve made extra income etc., but I thought it was important to start with the basics of actually setting the budget and moving on from there. After all, every successful journey starts with a good foundation.