Let’s face it. Debt is easy to get into but hard to escape. If you are in the deep throes of debt, do not panic. Administering some budgeting habits can slowly but surely help you become debt-free as long as you stick to them. Here are 7 budgeting habits to follow when you are settling debt.
1. Bills First, Fun Second
Everyone knows that bills first and fun expenses come second if you have any discretionary income left over. Sometimes, we may want to put off paying our debts to have fun with our money, spending it how we would like such as playing a casino online. While this is tempting, this bad habit will make you stay in debt rather than escape it.
Evaluate your income and compare it to your debts (credit cards and personal loans) and bills (electric, gas, phone, and etcetera). Even if you do not have any money left over to spend on products or experiences you want, find other ways to have fun at home for free or attend free events in your community. For example, your local library may have adult book clubs or other free events that you can attend where you can still have fun without spending a penny.
2. Pack Your Lunch
Take the extra few minutes each night before bed to pack your lunch for the next day to eat at work. It could feel like a minor inconvenience, but this extra time spent packing lunch for the next day can save you so much money.
Say you cook a $10 pot of spaghetti and meat sauce that lasts five lunches. This means you are spending only $2 each day on lunch. If you purchase your favorite meal at a fast food restaurant every day for $5 throughout the work week, that means it’ll be $25 spent for the entire week on work lunches. In this scenario, you can save $15 by bringing your spaghetti leftovers from home.
3. Lay Out A Detailed Budget
List all your debts, bills, and other monthly financial responsibilities on an Excel or Google Sheets spreadsheet. Note all your income sources at the top of the spreadsheet, how much each bill or debt repayment amount is per month, and their prospective due dates.
This will help you keep track of all your upcoming bills and prioritize having enough in your account to cover them. By following the other budgeting habits outlined in this blog, you can stick to your budget religiously so there are no issues covering bills or debt repayment bills.
4. Pay More Towards the Debt With Higher Interest Rates
Interest rates can put you in a tough spot in increasing how much you owe over time as you pay off debt. You should prioritize paying more than the minimum payment for any of your debt, but this habit should be more so with credit cards, personal loans, or student loans with a higher interest rate. For example, if you have a credit card with a 20% interest rate and a personal loan with a 25% interest rate, try placing a little extra towards the personal loan each month to get it paid down faster.
5. Build An Emergency Fund
We know the challenges of building an emergency fund on a tight budget However, it’s essential to build this to prepare for unexpected expenses like car repair. Try to start small and devote at least $10 to $20 per month to your emergency fund. Designate a separate pocket in your bank account for this emergency fund or open a new account to transfer to it monthly. As you pay off more debt and have more discretionary income, you can devote extra funds to your emergency fund each month.
6. Cut Unnecessary Expenses
One of the most challenging budgeting habits while settling debt may be cutting unnecessary expenses. For example, if you have three streaming services, pick the one you use more and cancel the rest. Eating out, buying items for hobbies, and purchasing extras of what you already have could also be considered unnecessary expenses during this time that require extra budgeting.
7. Allocate Some Windfalls To Debt Repayment
In terms of finance, a windfall is a large amount of extra funding you receive which could be a monetary gift from someone or your yearly tax refund. Tax time is one of the best times to reduce your debt substantially or get out of debt completely, depending on how much you have to pay back.
Try budgeting your windfalls accordingly by allocating at least 20% to 30% to debt repayment. While it’s tempting to want to splurge using this extra money, take the responsible route to pay down more debt and you will have extra spending money going forward once this debt is gone for good.