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Extra Money Every Month, But Still In Debt - A Case Study
In order to get out of debt, it's crucial to examine your monthly cash flow and create a budget that outlines how you will make up for the difference every month. But what if you have positive cash flow every month? Is it time to celebrate?
Not so fast, hotshot. Take another look at your numbers. Perhaps you have a surplus every month because you're not paying all your bills or are using credit cards. If this is true, you still need to reduce your spending in order to cover your monthly expenses.
Perhaps your cash flow is positive because you're paying the minimum amount on your credit cards. Don't let this fool you into a false sense of security! Look at your cash, and set up your online bills to be paid automatically. For example, if your surplus is $200 each month, visit your credit card company's website and set up a fixed payment of $200; this forces you to systematically pay down your high interest credit.
Whenever you find a surplus, use it to pay down your debts. Start with the highest priority debts (such as paying your mortgage on time) and then moving to unsecured debt like credit cards. Always start with the credit cards with the highest interest rate and pay them off before moving to lower interest debts. Once all your debts have been paid off, you can once again start building up your savings and retirement account.
If you are facing a load of debt, it's best to stop investing into your savings and/or retirement account, due to the low interest they earn you. If you have a savings account that earns 3%, you are better off paying down the credit card with 20% interest first. Plug the holes in your finances before building up your savings!
In order to pay down your debts, you must set -and stick with- a monthly budget. One of the best ways to accomplish this is to write it down and place it in a prominent spot of your home. The more visible it is, the better. In addition, using the auto bill pay feature on your debts and fixed expenses is a great way to pay down your debts without having to lift a finger.
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