Money is one of the basic needs that every person or family requires to function. One of the best ways to keep a well-functioning household is to make sure that the collective money is appropriately spent. In order to do that, you would have to set specific budgets for the household, as well as your personal needs.
Budgets are often categorized according to importance, but different financial situations require various budget systems. If you’re a person who’s struggling with loans and negatives in your monthly spending, you can create a budget planner system to help you cope and eventually eliminate your debt. Budget planner systems vary according to your needs and situation, but it’s important to keep an open mind and try out various techniques.
Here are some ways to deal with debt through a budget planner system:
1. Automate your budget planner system
The best thing about living in a modern world is the ability of machines, applications, and programs to do redundant and basic human tasks. With the rise of smartphones and mobile apps, almost every process can be automated. In terms of budget planning systems, you can easily choose from thousands of applications that can automatically compute data input.
If you want to conveniently plot out your budget and debt control plans, you can do so right at your fingertips. Most of the financial assistant software can easily be accessed in your mobile devices. Here are some of the automated financial assistance apps that can help with your budget planner system:
- Budget calculator – a web application by Keepify that allows you to look at your entire budget in a pie chart. It makes use of a dollar currency. Budget calculator has a very simple interface that capitalizes on simple categories and shows the total budget in a pie chart. Currently, however, you can’t set the currency into anything other than the default dollar.
- Mint – a free iOS/Android application by Intuit that boasts of an all-in-one finance assistance solution such as budget planning, bill and credit tracking. It makes use of a default currency and it currently can’t be converted to a native currency, but people who use dollars would benefit from this app. Currently, Mint is only available to residents of the United States and Canada.
- Albert – a more sophisticated iOS application for people who want to slowly get rid of their debts and improve financial health. The app takes care of budgeting, saving, and reducing debts systematically. Albert acts like a financial assistant or friend, but the app is available to limited countries only.
- PocketGuard – a simple budgeting app available for both Android and iOS that keeps track of spending and informs you of your spending limits. Like some of the famous financial apps, this application is available for limited countries only.
2. Do a self-assessment of your financial situation
You have to do an honest evaluation of where you financially stand so that you can appropriately plan your resources and budget your funds. In your assessment, make sure that you underestimate your income, therefore, you use the minimum amount as your base. Overestimate your bills so that you have extra when the amounts turn out differently from what you have planned.
Here are some of the things you need to map out:
- Your net income after taxes, contributions, and others
- Your combined household income, if applicable
- Your constants such as electricity, water, cable, and phone bills
- Your loans and debts
Check your current money with the expected spendings for the month, and balance if you are in the safe zone or already in the red. If your income is grossly below your living expenses, then you might consider getting the help of other family members or finding a creative way to curb your expenses.
3. Follow the 50-30-20 budget
If you’re struggling with debt and you want to get rid of it quickly, then you can try the 50-30-20 way of budgeting your money. The 50-30-20 budget is a pretty straightforward budget system that doesn’t take a mathematical genius to compute. The 50-30-20 system basically means that your money should be divided into three parts:
- 50% for necessities such as bills, food, clothes, and others.
- 30% for wants like entertainment, gadgets, leisurely activities, and others.
- 20% for savings or paying off debts. In the long run, once you’ve finished paying off all debts, you can save money.
From the aforementioned formula, you can then be more specific on how much you’re spending on what items. This method is good for someone who has a lot of debt because having an allowance of 20% for debt repayment is an assurance that you are slowly lowering your debt balance. For example, you have a 2,000 USD monthly income, you can set aside 400 USD for debt or savings and that goes a long way.
4. Use the envelope system to minimize spending
One of the most popular budget planning methods for getting rid of debt is the envelope system. It’s a technique that helps in limiting unnecessary spending and disciplining the household budget. The envelope method is a kind of budgeting system that prevents you from spending too much on one item, and if you want to use it to prioritize debt repayment then it’s more than possible.
Here are ways on how you could do the envelope system:
- Gather as many envelopes as your budget categories, especially if you are spending for an entire household that includes other members.
- Label them according to the items you usually spend for in a month, such as bills, allowances, rent, entertainment, groceries, debt payments, and others.
- Distribute money in the envelopes according to your set budget and prioritize on debt payment so that you won’t fall even deeper into debt.
- You can spend money that’s in the envelope for a certain purpose. For example, you have 200 USD alloted for monthly groceries, you should only take grocery money from that envelope and stop doing groceries when the money runs out.
The envelope system may be constrictive to some but it’s a form of discipline.
5. Practice reverse budgeting
Most people budget an entire amount and divide it according to important factors. Reverse budgeting is a kind of budgeting that prioritizes saving over everything else. In order to do reverse budgeting, you have to pay yourself first. This method means that you remove a percentage of your income to use as savings before you create a budget off of it.
Here are some reasons why reverse budgeting is recommended:
- You will save the money that you set aside.
- By subtracting your savings first, you can easily have money to use for emergencies.
- If you’re doing the 50-30-20, getting a small percentage will allow you to limit your spending and increase your savings or debt repayments.
6. Pay off debts through stacking method
Stacking method is a good supplement to your budget planning system because debt payment should take priority on your budgeting. Debts could cause a huge dent in your living expenses so it’s very important to prioritize paying them off when you can so that the interests don’t increase into an amount that is too much to handle. In budgeting with your debts as priority, you have to deploy debt-elimination techniques like stacking.
The stacking technique is done through the following steps:
- Stack up all the debts in a spreadsheet
- Indicate the remaining balances and interest rates
- Pay the minimum for each loan
- Pay more to the ones with the highest interest rates and aim to clear them faster
7. Pay off debts through snowball method
The snowball method is another debt-clearing strategy to supplement your budget planning system to deal with outstanding balances. It operates with the principle that you have to get rid of the small amounts first before it accumulates into something bigger, thus the term snowball. It focuses on eliminating debts one by one instead of scraping some of the amounts slowly. The snowball method is a good way to sort through a lot of debts with small balances each.
The snowball technique is done through the following steps:
- Create a list of all your debts, preferably in a spreadsheet
- Lay out the remaining balances and interest rates of each
- Pay the minimum for each loan
- Pay more to the ones with the least remaining balance and aim to clear them faster
Every person needs money to survive. One of the things you need to learn is to make the most out of your limited resources without resorting to further debt. When you’re struggling with things like loans, debts and other negative balances, the compounding interest could get harder to deal with as time passes.
Dealing with outstanding debts and creating budget plans are some of the things you need to do to secure your future. In order to have a good and comfortable life, you have to make sure that your budget plans are sound and your debts are cleared using methods customized to fit your own financial situation.