Debt reduction is one of the most important goals to map out within your budget, but it is often the easiest one to neglect or put on the backburner.
Let’s say you’ve finally gotten serious about creating a budget for your household and are committed to sticking to it. You’ve tallied up your income and expenses and set aside a chunk of your disposable income into savings. You’re living at or below your means, so why does it seem like your financial situation is not improving? Why are you still unable to reach your financial goals?
Many times the reason is that you haven’t taken a close enough look at your credit card debt. Sure, your credit card payments may be marked as monthly expenses in your budget, but are you budgeting at or near the minimum payment? If this is the case, you may have just discovered a fatal flaw in your current budget.
Finance guru Dave Ramsey gives the following advice to those in this situation using what he calls the Debt Snowball Plan. The plan starts with budgeting to sock $1,000 away in savings for emergencies, so you don’t end up in even greater debt in the case that you lose your job, your vehicle breaks down, or you have a health crisis. Accomplishing this, your second goal is to shift your focus off of savings and on to debt reduction. You begin by budgeting as much of your disposable income as possible into paying down the credit card with the lowest balance, paying minimum payments to all your other creditors. Once you pay off the lowest balance, move on to the second lowest balance, overpaying your monthly payment with the excess leftover in your budget from the first paid-off card. This is where the “snowballing” starts taking place. If you encounter two credit cards with similar balances, attack the one with the highest interest rate. However, first you will need to calculate how much debt you owe to each credit card company. Credit card companies often profit from the fact that those they lend money to never quite nail down how much they owe. If you don’t know how much you owe, it is difficult to set budgeting goals for debt reduction. There are a variety of free debt calculators to help you toward this end. Click here to access one of such calculators.
Debt reduction is still an important budgetary consideration even if you have zero credit card debt. Can you budget extra money to overpay on your vehicle or home mortgage? You could save yourself hundreds or even thousands of dollars in interest by accelerating re-payment of these debts.
It’s time to ask yourself this question. When you set up a budget for your family, how much do you allocate for debt reduction? Significantly increasing that allocation could be your quickest ticket to financial freedom.
This guest post is contributed by Raine Parker, who writes for the online accounting degree blog. She welcomes your comments at her email Id: raine.parker6@gmail.com .