Wednesday, November 17, 2010

How to Write a Budget - How to Calculate Which Debts to Pay Off First

One of the most important ways to achieve financial freedom and erase debt is to write a budget. In writing your budget you need to calculate which debts to pay off first. Let's take a look at the steps to take.

When you write a budget it will have the effect of making you aware of your spending. If you are badly in debt this is probably something you have not been aware of for a long while. Credit card debt, for example, is very often made up of lots of smaller purchases that you have been unconscious of.

Your budget

Gather all of your financial data. This includes all of your sources of income, your bills, bank account and credit card statements.
List your expenses either on paper or on a spreadsheet. These expenses should include your essential commitments such as living expenses, utility bills, food and groceries, loan repayments and transportation.
Other expenses such as entertainment and spending on gifts are more flexible and can be reduced to fit your budget. It would pay to keep a notebook and record everything you spend for over the month.
All expenses are added and then subtracted from your income. If your income covers your expenses with extra available this is known as a surplus. If your expenses exceed income you will have a deficit and must make adjustments to keep your spending in line.
In order to pay off your debt you will need to reduce spending. It is important to reduce where you can.
Any surplus can be paid towards debt.
Your debts

List all debts, noting the balance, the interest rate and the loan payment. Also include who the debt is payable to.
Prioritize your debts. Are any past due? Are creditors making demands? Consider which debts have the highest interest rates. These are your highest priorities.
Pay the minimum on any loan that has the lowest interest rate and always pay on time. Do not miss any payments.
Firstly update the payments that are overdue. Negotiate with the lender if required.
Apply the surplus you have calculated in your budget to the debt with the highest interest rate.
If there is a small loan sometimes it is useful to get that paid up for the satisfaction it brings. Generally you should concentrate on the high interest debt as a priority.
Stop spending on credit card. Do not increase your debt.
Once you have paid off one debt pay the same sum to the next debt. It will get easier.

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