Become Debt-Free by Budgeting: Proven Strategies 

• Facebook
• Pinterest

A financial debt can absolutely take a toll on you and you might start losing confidence in your abilities to become debt-free. In this article, we’ll learn how to become debt-free by budgeting: proven strategies. 

Whether it’s personal loans, credit card debts, or student loans, taking control of your finances is the first step towards becoming debt-free. Having complete knowledge of your income and expenses will bring you peace and financial freedom. 

In this article we’ll learn: 

• What is budgeting and what are the benefits of budgeting
• Proven steps and strategies that will help you become debt-free
• How to create a debt repayment plan
• Tips to avoid getting getting into debt again

Budgeting of Personal Finances

When it comes to management of personal finances, the first step is budgeting. 

What is budgeting?

Budgeting is the foundation of financial stability. Be it a country, corporation or person, budgeting is the method by which finances are controlled, and savings and debt repayments become possible.

If you’re new to budgeting, don’t worry – we’ll walk you through the step by step process of budgeting, making it easy to track your income, expenses and savings to achieve your goals.

According to NISM (National Institute of Securities Markets) – “Budgeting involves taking a hard look at your income and expenses, identifying areas where you can cut back, and allocate funds in a way that allows you to live within your means. By doing this, one can ensure that there is enough money to cover the essential expenses, such as housing, food, and healthcare, while also setting aside funds for emergencies and other unexpected expenses. It is critical to understand the difference between needs, wants, and desires.”

Benefits of Budgeting: 

The first and the most significant benefit of budgeting and making it a habit is that you become in charge of your finances. Without budgeting your daily expenses and savings, your personal finances are either a mess, or a growing list of “how did all the money get spent and where?”

Generally, people want to know how to earn money and how to earn it fast. But have you tried managing what you already have? As little as it may be, making the most of your current income is a much more realistic goal that will yield you amazing benefits.

Budgeting is your first step towards achieving financial freedom that lets you handle your money more efficiently. And it is not because you somehow cleared all your debts and got extra cash in your pocket.

By budgeting, you become aware of your spending habits. This in turn lets you have a clear picture of when to cut unnecessary expenses and if you can have any saving in your present budget.

Keeping track of your debts is also a major part of budgeting. It lets you become capable of tackling your income and debts more efficiently.

You know it’s fantastic to have big dreams and to work with passion to make those dreams a reality, however, even the wealthiest people in the world do budgeting to further their dreams. They either by themselves or by hiring an accountant. That’s how they’re able to do more with the money they have and then make even more money, otherwise even a billionaire can go bankrupt without keeping track of their losses and gains. 

We’ll discuss Become Debt-Free by Budgeting: Proven Strategies but why let us first get a general understanding of the other benefits of budgeting and how to start budgeting as a novice?

Apart from above stated benefit the other benefits of budgeting are:

1. Budgeting is the key to achieving financial stability by taking control of your money matters and directing that money where it should go instead of wondering where it went. 
2. Budgeting helps reduce debts and to improve your credit score thereby leading to long-term savings and financial freedom. 
3. Our quality of life and mental health suffer when we face bad times in our life. We may have to make unexpected expenses or even face times where buying basic necessities may also become difficult. Budgeting of your expenses and savings now can help in improving your quality of life in the long run by making sure you have enough funds for essential and unexpected expenses. 

In short, budgeting:

• Helps you avoid unnecessary debt
• Allows you to save for emergencies and future goals
• Reduce financial stress by giving you a clear financial plan for your monthly and yearly expenses
• Enables you to make better spending decisions

Types of Budgeting Rules and Methods

Step-by-Step Guide to Budgeting

(STEP 1) Track Your Income

• Start by making a list of all your sources of income. Make an all inclusive list to include you salary, freelance work, or any other side gigs you’re working on.
• Remember your budget is based on on your in-hand income after tax reductions so don’t include income with tax but without tax.

(STEP 2) List Your Monthly Expenses

Next write down all your expenses, including:

• Fixed Expenses: Rent, Mortgage, Insurance and Debt Payments
• Essential Expenses: Groceries, Medicine, Transportation, Utilities
• Discretionary Expenses: Entertainment, dinning outing, shopping etc.

This is essentially a list of payments of your needs and wants. You can use bank statements, online payment history, and receipts to get an accurate estimate of your spending habits. You can ask your family to give you a list of payments made if you give them allowances for monthly expenditure.

Remember the idea is to get a clear picture of your overall spending habits and this also includes your family. Doing so will also instill a sense of budgeting early on in your children to make them more responsible.

(STEP 3) Categorize Your Expenses

You can use any method to categories your monthly spending or can use the 50/30/20 Rule to categories your monthly spendings:

• 50% for Needs: Rent, utility bills, groceries and essential transpiration
• 30% for Wants: Entertainment, hobbies, eating out, any course or program subscription
• 20% for Savings and Debt Repayment: Emergency funds, retirement savings, and debt payoffs

(STEP 4) Set Realistic Financial Goals

Decide what you’re budgeting for. Do you want to save money for something? or payoff a debt? or do you want to build an emergency fund?

Set SMART Goals (Specific, Measurable, Achievable, Relevant and Time-bound) to stay motivated and to keep a track of it.

You can also use a budgeting tool or app to make your work easy for you if you don’t want to do it manually. But be sure to check the safety precautions of the apps you use because you’re dealing with finance-related work. Make sure it is authentic and effective.

Tools like Google Sheets and Excel are good for creating spreadsheets.

(STEP 5) STICK TO YOUR BUDGETING HABIT

Building a budgeting habit doesn’t happen overnight and successfully achieving your financial goals also doesn’t happen overnight. It takes consistency to reap the fruits of success and to build a life of financial freedom.

So be sure to do the following to build and maintain your budgeting habit if you want to Become Debt-Free by Budgeting:

• Be sure to check your budget weekly to stay on track
• Cut down on unnecessary expenditure if needed
• Adjust for unexpected expenses like medical bills or car repair

• Facebook
• Pinterest

Proven Steps and Strategies that will Help you Become Debt-Free By Doing Budgeting

(STEP 1) To take the first step towards becoming debt-free by budgeting you’ll need to know exactly how much you owe. 

If you’ve begun your budgeting journey you’ll be well aware of your finances by now. If not then the step for you is to start making a budget for your finances. Once you’ve listed down your sources of income, income in hand after-tax deduction, your expenses, your savings and debts to be paid off.

After this, we’ll focus on the strategies to tackle your debts. You will then need to start by:

• Making a list of all your debts
• Include the amount owed, interest rates charged if any, and minimum payment you can make for each of these debts
• Highlight the highest interest debts you owe

Use a debt tracker to keep track of your debts. Don’t just trust any third-person available debt tracker online. Either make one manually or get a printable debt tracker. It’s always best to stay safe and secure with your financial knowledge.

(STEP 2) Choose a Debt Repayment Strategy/ Method

Some of the well known debt repayment strategies or methods are: 

The Debt Snowball Method (This is the best method to stay motivated)

1. You start by paying off the smallest debt first 
2. Once that debt is paid, then roll onto the next debt which is bigger than the smallest debt you owed. 
3. Keep going from the smallest to the biggest one. With each debt you repay you will feel a sense of peace and will build your momentum to strive towards a debt free life. 

This method is best for those who need quicker wins to stay motivated in the long run.

The Debt Avalanche Method (This method is best for saving money rather than getting quick wins)

1. We start by paying the debt with the highest interest first. If you have sufficient funds at the moment and not many small debts that require your urgent attention then start by paying off your debt with the highest interest rate.
2. Your focus should be to eliminate that big boulder on your shoulder for good!
3. This will also keep you motivated to save more money to not only pay off the debts but to also have enough funds just in case you need to make urgent payments. 

This method is best for people who want to focus on repaying the big debts with high interests first, who can stick with long-term goals even without immediate results and want to build an income saving habit. 

(STEP 3) Cut Unnecessary Expenses & Increase Income 

To become debt free or to pay off your debts faster, you need extra money. But what is “extra money”?

We have discussed what is income, different types of income and what are expenses, and the different types of expenses earlier in this article. The list of incomes we created come from two sources: active and passive.

Active income is the income you get from your job or the money you generate from your business while working for it actively is your active income. This active income is the main source of your household.

Passive income is the income you generate from a side hustle or a side business that you work on apart from your main job or business to earn extra cash. Passive can be earned from online and offline sources.

Passive income can be earned online from freelancing, selling courses, blogging making YouTube videos, etc., and offline you could have a small project like handcrafted jewelry, pottery, stationary, tutoring children, cloud kitchen, etc.

So you do this extra work to earn extra cash to reduce your financial burden and for a good quality of life. But not everyone has a side hustle going or even if they do it might not be yielding them the results they want.

So how do you then manage to be debt-free if you aren’t able to generate extra? Simple. You cut any and all unnecessary expenses.

• Facebook
• Pinterest

So How Do We Cut Off Unnecessary Expenses & Increase Income to Payoff Debts?

• Reduce Expenses 
• Increase Your Extra Income

Reduce Expenses

Remember the goal is to live a debt free life first. A good life can only come when you’re living a debt free life.

1. Try to live a life within limits and don’t get stressed due to society and peer pressure. Simple living is better than high-end living.  
2. Cook at home instead of eating out.
3. Cancel unused subscriptions. 
4. Let go of unhealthy habits.
5. Try to shop from wholesalers rather than retailers. 

Increase Your Extra Income

1. Create diverse income streams but keep it low budget until you see actual steady growth. Try to create a low investment or no investment side business that you’re good in so that you can do what you love and also add some passive income (like freelancing, tutoring, skill share, tutoring etc.)
2. Sell unused items (furniture, clothes, books, gadgets, etc.) 
3. Negotiate a salary raise. 

Even a few extra hundred bucks per month can make a huge difference in the long run! Snowball effect isn’t just related to debts, even a small side income or savings can snowball into a good amount.

(STEP 4) Consolidating or Negotiating Your Debt (If possible)

If you have more than one high interest debts then consider the following options: 

• Debt consolidation of loan 
• Negotiate with lenders
• Balance transfer of credit cards

1. Debt Consolidation of Loan

Debt consolidation of loans is the method of combining more than one loan into one new loan. Such consolidated loans will offer lower rates of interest thereby decreasing the number of payments you have to make each month. This is an assured way of dealing with your high-interest loans. 

2. Debt Restructuring 

Debt restructuring is also a great option when you feel like making payments for loans is becoming impossible. You can initiate the talks with your lenders to revise the terms of interest rates, or repayment terms, or extending the loan tenure etc. will make such multiple debts manageable.  

At the end of the day banks just want to make sure they get their money back and any loan they’ve given doesn’t become NPA (a non performing asset). Having some money is better than having no money at all. Banks and most other credit institutions usually will be willing to either consolidate or restructure your loans or they may also offer more feasible options for you as long as they don’t incur a loss. 

Proactive conversations and initiative with your creditor are a good option when you have difficulty making payments for your loans. Consult a trusted financial consultant as per your personal situation. 

3. Balance Transfer Credit Card

A balance transfer credit card is another way you can temporarily shift the burden of repaying the outstanding balance on your current credit cards to this new credit card that has 0% interest rate but only for a limited period of time or for the “promotional offer” time period.

This 0% interest rate frame work during the promotional offer period grants you the opportunity to arrange the amount you need to repay the outstanding balance on your current credit cards while also potentially allowing you to save on interest charges during this time. But it is important to pay off your balance before this “promotional period” ends.

This is also another form of debit consolidation. You get to consolidate debts into one card, making it easier to manage your finances. And with lower rates, you can pay off your debt faster.

How it works? You apply for a new card, transfer your existing card debt to it, and then make payments on the new credit card.

These are some of the proven strategies that have shown effective results in bringing a person closer to becoming debt free by using budgeting for their personal finance.

I’ll repeat it once more, by taking control of your finances at present through budgeting (knowing your in hand income, savings and debt to pay off) you will be well equipped to find your way out of your debts effectively.

• Facebook
• Pinterest

FAQ