Ways to reduce debt by budgeting

As the world moves out of recession, it’s never been more important to assess your finances and sort out any debt problems you may have.

Although the recession will have left a lot of us with debts, it is important to understand that there are ways out. This article aims to highlight ways in which you can reduce your debts by budgeting. 

Budgeting is all about understanding and controlling your finances: your income and your expenditure. But how is it done?

Create a realistic budget

To create a realistic budget, you will need to work out your total income (everything you earn/receive each month) and your total expenditure (everything you spend on your ‘priority’ debts and day-to-day living expenses – so, your mortgage/rent, secured debts, food, petrol, utility bills, etc.).

Then you should subtract your total expenditure from your total income, which will leave you with your ‘disposable income’. This is simply the money you have available for saving, spending on yourself, and servicing your ‘non-priority’ debts (store/credit cards, unsecured loans, etc.).

Keep track of your spending

Now you have your budget, you will be able to see how much money you have available to spend each month. It is important that when you do spend, you keep track of it – it all adds up.

If you fail to keep track of everything you’ve spent, your budget won’t be accurate, and you might find you start running out of money before the end of the month.

By keeping track of your spending you can also see where you are wasting your money, which leads us onto the next point…

Cut back on your non-essential spending

Once you can successfully keep track of where all your money is going, you should be able to identify any areas where you are spending money you could be using to overpay your debts.

By cutting back on this non-essential spending, you can ‘free up’ money to put towards your debts, so you can clear them faster than you would if you just kept making the minimum payments.

Plan what you need to spend for the month

At the start of every month, sit down and plan out what you need to spend for the weeks ahead – for example, food, travel costs, bills, debt repayments – taking into account any unusual expenses (the kind you just don’t run into every month).

Once you have compiled your list, you should add up how much each expense will cost you. Of course, you may not be able to predict how much your travel will cost you, or how much you’ll spend on food, so if necessary you’ll need to estimatecosts like these.

Planning how much you need to spend each month means you will be in much better control of where your money is going. What’s more, you will be able to spot early on if you won’t have enough money to cover your expenses – and see if you can find a way around it.

Unfortunately, budgeting alone won’t be enough for everyone – some people’s problems are so serious that their income simply isn’t enough to cover their expenses.

If that sounds like you, you should contact a professional debt adviser.

The right debt adviser will be able to assess your situation and let you know if a professional debt solution could be right for you. This will vary from country to country – in the UK, for example, people with unmanageable debt may be able to enter into debt management plans or IVAs (Individual Voluntary Arrangement).

This guest post was written by Melanie Taylor, personal finance expert at financial solutions provider Think Money.