Say Goodbye to Living Paycheck to Paycheck: Dealing with Debt

dealing-with-debt

This post is part of a series.  To start the series from the beginning, click here.  To browse through the series, click here.

Debt is one of the main reasons so many people live paycheck to paycheck.  Unfortunately, there is no quick solution to debt.  You can however be smart about your debt.

Some things to consider when evaluating your debt include the amount of debt, interest rate, and debt sources.

Create a list of your debt:

Example:

Debt Source Interest Rate Total Debt
Student Loan 3.5% $20,000
Credit Card 1 20% $7,000
Credit Card 2 13% $3,000
Car Loan 8% $5,000

Looking at the combined debt of $35,000 here can be very overwhelming.  Before attempting to tackle your debt, you need to create a plan.

Let’s sort the debt based on interest rate.

Debt Source Interest Rate Total Debt
Credit Card 1 20% $7,000
Credit Card 2 13% $3,000
Car Loan 8% $5,000
Student Loan 3.5% $20,000

The larger the interest rate, the more money you are paying to keep that account open.   Notice that the student loan has a significantly lower interest rate than the credit cards.  This means that this debt does not cost as much to keep per dollar as the other debt.  Additionally, student loans and home loans are considered Good Debt where car loans and credit cards are considered Bad Debt.

Good debt is an investment or something that will grow over time.  An education will cause your knowledge and income to grow and a house will appreciate over time.

Bad debt is a debt that cannot be recovered.  Over time, cars lose value.  Similarly, items purchased on a credit card lose value over time.

There are two main ways to tackle debt.  One way is to pay off the one that has the highest interest rate first.  This way, you minimize the fees you are required to pay.  The second way is to pay off the debt with the lowest amount first.  Neither way is better than the other, it is all up to preference.

Once you decide which way you are going to pay off your debts, focus only on the debt you chose to pay off first.  Of course, still make your regular payments on all of your debts.  But, think in baby steps.  The goal is to pay off one debt.

Make sure to keep enough money in an emergency fund while paying off debts to ensure that you don’t incur more debt.

 

Each month, use your new budgeting system and instead of having a category called ‘savings’, call that category ‘debt’.  The money that is allocated for savings will go towards paying off the debt.  The first debt is the hardest to pay off because it seems to go the slowest.  Don’t give up.

Once your first debt is paid off, give yourself a pat on the back.  Great job!  Now, pick the next debt to tackle.  This debt will seem to go faster because you can not only apply the minimum payment that you’ve been making to the account, but you can also apply the money that you had been putting towards the first debt.

Once you have your bad debt paid off, you can pay off your good debt monthly or apply some extra funds to your payment each month.  Good debt is nothing to stress about and is normal.  At this point, it is more important to have a substantial savings account than to have zero debt.

Begin adding some money back towards savings every month.  If your savings seems to be growing very quickly and you want to drop a large amount onto the loan, feel free!  This is great news!  You are living well within your means!

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Say Goodbye to Living Paycheck to Paycheck: Discipline and Accountability

discipline-and-accountability

This post is part of a series.  To start the series from the beginning, click here.  To browse through the series, click here.

Now that you have chosen your budgeting direction, system, and tools, it is time to put them all to work!

A budget is only as good as you make it.  If you don’t continuously work on your budgeting, it is likely to fail.  The more time you put in to your budgeting, the more you will be rewarded.

What will help to get you motivated to track your finances and stick to your budgets?  This is a very important question for you to answer for yourself before you begin your new budgeting strategy.

Once you’ve determine what will help you be disciplined and will hold you accountable, you are ready to begin budgeting.

Here are five simple steps to keep you disciplined:

  1. Create a Schedule – Creating a schedule for your budgeting will help you stay on track. A simple schedule could be:
    1. Create your breakdown on the 1st.
    2. Check accuracy and make minor adjustments to the budget on the 15th.
    3. Follow up on how the month went.
  1. Share your budgeting plan with a trusted person. – One of the best ways to keep yourself accountable is to enlist someone to help you. You could tell this person as much or as little about your budget as you are comfortable with.  The details of the budget aren’t as important to this conversation as the task of budgeting and following up.
  1. Check in Often – Even though you have specific dates in your schedule, it is important to check in often. You should be looking at your budget every few days or at least every time a new bill is paid or new income is received.  This is important to make sure everything is on track.
  1. Make small changes as necessary – The budgeting system you chose may not end up working as well as you’d hoped. It is okay to make changes to your process, slowly.  Don’t try to make too many changes at once because it can become overwhelming.  Make small changes to only the parts that aren’t working.  If none of the parts seem to be working together, take a step back and consider why they aren’t working.  Is it because there isn’t enough follow up?  Or does money seem to be disappearing?  Most of the time, the budgeting issue isn’t because the tools aren’t working but because there isn’t enough discipline.
  1. Follow up – It is always important to follow up on your budgeting and your changes. You should also be checking in with your savings account every month.  Is your savings increasing?  If so, that’s great! If not, evaluate why.  Is there a spending area that can be decreased?

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Say Goodbye to Living Paycheck to Paycheck: Forward Budgeting and the Cash System

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This post is part of a series.  To start the series from the beginning, click here.  To browse through the series, click here.

Forward budgeting, also known as the ‘forward roll’ is also a three-step process.  Each month, you project your expenses and savings.  At the end of the month, any funds that weren’t used will be transferred into your savings account.  This process repeats each month.

Envelopes

The envelope system can be used in a similar method to reverse budgeting.  The only difference is that you don’t put a set amount of money into the Savings envelope at the beginning of the month.

Instead, allocate the money into the spending envelopes.  At the end of the month, move any money that is left in the envelopes to the Savings envelope.

envelopes

Paper

Using a printable is a fun way of tracking your finances.  There are many budgeting printables online that would be a great solution for your spending tracking and savings rollover.

Computer Spreadsheet

A computer spreadsheet is very helpful when using the forward roll method.  The main point of the forward roll is to maximize saving potential.  A computer spreadsheet can help you to project your savings over time.  This is very useful when saving up for a large purchase like a house or a car.  You can find multiple examples of tracking the forward roll method with a spreadsheet here.

Apps/Programs

Apps and programs are a great way of tracking spending but can become very complicated when tracking cash.  I recommend using either a paper tool or a spreadsheet to track cash finances.

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