Have you ever gotten stuck in quicksand? Well, hopefully you've never had to deal with getting yourself unstuck from a pool of fast-sinking sand. But have you ever had a moment where you got stuck somewhere and couldn't leave, couldn't get in, couldn't get yourself out of a sticky situation, literally or figuratively, as soon as you'd have liked? That's exactly how having a good deal of debt feels like. If you're one of the unfortunate few who fell for the credit trap, surely, you've had those moments of sobering realization when you realized you're mired in debt and you need to get out of it -- quick. It's exactly in those moments when you could use the help of a "get out of debt budget."
What exactly is a "Get Out Of Debt Budget"?
A get out of debt budget is creating a plan that would tell your money where it's supposed to go, bearing in mind the fact that you have to repay your debts.
Conventional wisdom says that you should be working on paying off debts with the highest interest first. But Dave Ramsey and a growing number of financial gurus are saying that it's not about getting rid of the debt with the highest interest rate first. Rather, it's about keeping oneself inspired in repaying debt until you're totally free of it.
1. Build An Emergency Fund First. "What?! An emergency fund?! I thought we were on the road to getting out of debt?!" Relax. Building an emergency fund first means that you're building a buffer fund, an avenue of leverage in the event that bad things happen. Having an emergency fund built BEFORE you pay down debt ensures that you stay on track in case anything untoward happens.
2. Figure Out How Much You Owe. As they say, "Knowing is half the battle." Know what you're up against, and identify the height of the mountain you're about to attempt to conquer. In keeping with our assertion that you should keep yourself inspired and motivated, order the list of your debts by the lowest amount you need to pay first. This way, your "get out of debt budget" is already structured, organized and systematic.
3. Figure Out How Much You Can Afford To Set Aside For Debt Repayment Every Payday. In the same breath, you will also need to figure out your whole budget so that you will be able to determine how much should go to debt on a per-payday basis. Don't worry if what you can allot to debt repayment looks too small; better that you'll remain realistic about what you can pay than to overshoot and sacrifice your living allowances and payments for regular bills like rent, utilities and the like.
4. When You Know Your Debt Allotment, You Will Be Able To Figure Out How Long Before You Can Be Free Of Debt. You will also be able to figure out how long it would take to get yourself out of debt per item on your debt list. Knowing when you'll be free of debt; that you'll be free of debt soon will also work as a motivator.
When you have all these four steps down pat, you will be ready to pay your debt!
Dave Ramsey's Ideal Budget; Click Image to see full size.
Good luck with budgeting, and here's to your debt freedom!
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