The #1 way to pay off debt fast is to create a budget. Queue the high-pitched, ax murderer screams in the background…
Yes, CREATE A BUDGET!
This may not be big news to you. You may be rolling your eyes at this, seemingly, tedious task. Or, you may just be scared to see what it is you have and don’t have. But this is, in all honesty, the one thing you need to do to understand your debt and truly take control of your financial situation.
WHAT IS A BUDGET
A budget is a basic but powerful tool that allows you to view, track, and manage your income and expenses. Budgeting is the action you take to create that plan about where to allocate your money.
While it’s common to think of it as this rigid thing in your face telling you that you have to go cold turkey and cut off everything that you love, a budget is more of a guide. Like your life, a budget is fluid and may change each month depending on last-minute unexpected circumstances.
WHY IS A BUDGET IMPORTANT
A budget ensures that you have enough money to pay your bills, keep a roof over your head, and groceries in the fridge. But, most importantly, a budget allows you to spend on what really matters to you…and stops you from using credit cards as a crutch.
It is the best way to conquer any fears about your financial situation because the numbers are right in front of your face. You have complete visibility, something material that you have power over, and can take control of.
Sure, when it comes down to it, it is just money in and money out. However, now, you have the opportunity to examine areas of your spending habits that will be most impactful on your life and your financial goals. A budget allows you to be intentional, prioritize, and plan how you will use your hard-earned money based on what is most important to you in the short-term and the long-term. You are no longer in denial and you have a plan to enjoy all that you want and need.
WHAT DO YOU HAVE || THE CURRENT SITUATION
When you first create a budget, start simple with what you have. Paint a picture of your current financial situation. Think of this as a general overview to acknowledge the start of your financial journey.
- Savings: General savings account, Retirement accounts, College funds
- Emergency Fund
- Investments: Mutual funds, Stocks, Bonds, Real Estate
* For any debt, list out each amount along with the interest rate.
- Credit Card Debt(s)
- Auto Loan
- Student Loans(s)
- Personal Loan
WHERE DOES YOUR MONEY GO
After you have written out exactly what you have, it’s time to list out everything that you spend money on. This is the toughest part because, well, you are going to be backtracking a bit. Start with the previous month. Grab your receipts. Pull your credit card statements and your checking account statements and list out everything you see including those monthly auto-pays. Trust me. It will be over before you know it!
I like to look at my spending habits from three angles.
First, I like to look at the overall total amount of money spent. This number should not exceed your income. But, to no surprise, it just might. That’s why you are on this financial journey and are here reading this.
Second, I put each purchase into a category, such as Groceries or Restaurants, and add up those numbers to see where I spend the most money.
Third, within each category, I also like to itemize. For instance, I make a variety of purchases from my local drugstore. One trip could include skincare, household items, and medication so simply listing out the name of the drugstore and the total amount under one category would not really give me the full picture of what I tend to spend my money on each month. I want to see everything!
There are several ways to create and maintain a budget depending on your preferences, spending habits, and specific goals. Experiment with different methods and combine a few if needed. Ultimately, the best method and the one that you’re going to stick with is the one that is easiest and most convenient for you.
The 50/30/20 rule is a simple way to get you started with budgeting. It was popularized by Senator Elizabeth Warren and her daughter in the book, All Your Worth: The Ultimate Lifetime Money Plan. This rule focuses on three main categories to allocate your money. 50% of your income is for necessities. 30% is for wants and 20% goes to savings and debt. This method is less aggressive and great for those who do not have very specific financial goals like paying off debt. However, it is also a great way to ease your way into budgeting if you are wary of stricter methods since it factors in the fun things that you might not be quite ready to give up.
For a very tangible and material way of budgeting, there is the well-known envelope method where you use envelopes as an additional budgeting tool after you decide how much money will be allocated towards each category. Each envelope represents a spending category and you pull out cash and divide it amongst the envelopes. This method will, quite literally, allow you to see how quickly and easily your money can go.
Of course, in our technocentric society, there are also plenty of apps to get you started with budgeting and putting money aside for particular goals. Some may require more manual work and others may be more automated and link directly to your bank accounts. There is an app out there for everyone. Mint is great overall for money management. You Need A Budget is very popular for debt management and is favored by detailed budgeters. PocketGuard and Wally are helpful for simply tracking expenses.
Go Old School
My personal favorite is a combination of good ‘ol pen and paper and a Google Sheet. I spend most of my day in front of my computer with various Google tools so it was the most logical choice based on my habits and it ends up being the most convenient for me. With the spreadsheet, I can surface and review patterns in my spending from a variety of perspectives.
I can create a few different tabs based on any particular data that I want to focus on and shift numbers around if I want to prioritize or re-prioritize specific categories based on a particular goal.
Free budget templates are easy to find. The great thing about exploring the financial community is that we are all doing our best to help each other through these challenging times. So, we offer as much free support as we can.
If you have no idea how to create a budget or where to begin, feel free to explore The Progress Pill Free Budget Template.
The template contains several tabs. It will guide you with laying out all sources of income and all sources of debt. It will provide a budget overview as well as a more granular perspective with itemizations per category so that you know exactly where your hard-earned dollars are going. Itemization will help you to decide whether a specific item is a need or a want going forward.
Be sure to select file and MAKE A COPY if you decide to play around with it and plug in some numbers of your own. Formulas have been added where applicable. However, you may need to review and adjust them if a row is inserted or deleted. The spreadsheet can be accessed here.