Sunday, December 21st 2014

The Art of Budgeting For Debt Reduction

by Mr Credit Card

When you have credit card debt which you are trying to pay off, everybody will tell you to set up a debt reduction plan and budget and stick to your plan. But when you look at your budget, how do you decide which items to reduce? Here is how I would look at it.

I would first separate your budget and expenses into 3 groups.

Necessary Expenses

The first group is what I’ll call the necessary expenses. Your mortgage, auto loans, credit card debt, essential utilities, education expenses, groceries, gasoline fall under this category.

Expendable Expenses

The second category of expenses is what I would call expendable expenses. These are expenses you can actually do without. They include cable tv, netflix, gym memberships, club membership etc. These expenses tend to be recurring. These items in the past would have been considered luxuries, but are now considered essential!

Self Improvement Expenses

These expenses include spending on books, seminars, networking events that will help your career.

3 Ways to Deal with Each Type of Expense

There are three different strategies to deal with each type of expenses. For the neccessary expenses, you cannot do without them. But there are ways to reduce these expenses. You can refinance your mortgage, save on your groceries and utilities etc.

It is in the “expendable expenses” where you can actually save the most. Or at least sacrifice them temporarily until your finances improve. Stop going to the gym and work out at home or run outdoors. If you really wanted to, getting rid of your cable tv may lead to a more productive life. Netflix forces you to watch lots of movies where time can be spent at perhaps “money generating activities”.

While, it is tempting to trim all the fat, make sure you do not cut any muscle off! Activities like business networking and self-improvement may help you in your business or career and if anything, you should invest more in yourself.

Conclusion

When I graduated and just started work, I had very few “expendable expenses”. It was only after I had a few salary raises did I start adding some of these expenses. I did not have cable tv for a couple of years. I also stopped paying for my gym membership when I realized that me paying a monthly fee did not force me to work out regularly!. For what it’s worth, looking at my budget this way early in my working life has helped me tremendously in my finances.

One Response to “The Art of Budgeting For Debt Reduction”

  1. Robert Debt Reduction Guru Says:

    I completely agree that the first step to reducing one’s debts is to prioritize which ones get paid first. Ultimately this simple and intuitive step is overlooked by far too many people.

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