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Tips for creating a budget when facing significant debt

On Behalf of | Nov 27, 2019 | Firm News |

Some people end up with a significant amount of debt due to a job loss, medical emergency or divorce. For others, the debt creeps up on them before they know it. Regardless of which category you fall under, your debt has become overwhelming, and you need to do something quick.

You may wonder if one of your first efforts should be to cut expenses. This requires creating a budget that you think you can live with. Below are some tips on doing just that.

Creating a simple budget

In order to start, you need to understand your current financial situation. Do you know how much money you have coming in after taxes and how much needs to go out? You may also want to find a way to track your budget to make sure that you stay within it. That record could also help you see where you are spending your money. Once you have your information and tools in place, consider the following simple budgeting method:

  • Everyone has expenses that recur each month such as rent or mortgage, utilities, car payment, credit card payments, groceries and more. These are what you need to live and should take up around 50% of your budget.
  • Another 20% of your budget could go toward paying down your debt and building a savings account. This amount is in addition to the minimum payments you currently make on your debts.
  • The final 30% goes toward things you want. For instance, if you want to go out to eat, see a movie or something else.

If you find after a month or two that you continuously dip into your “wants” budget amount, then you may need to adjust your expenses even further. Part of the reason that many people fail when using a budget is that they believe it is written in stone. It is not. You can review and change it as needed in order to fine tune how you spend your money. Perhaps you realize that you spend more than you thought going out or buying a specialty coffee on the way to work.

You could cut out those luxuries, even if only temporarily, and add that money to your budget for paying off your bills and building a savings account. Budgets are much more flexible than most people think. The primary concern is to live within your means. Don’t use credit cards, especially to pay for essentials. Over time, you will start paying down your debts.

What can you do if a budget alone isn’t enough?

If you create a budget and stick to it, but your financial situation does not improve or even gets worse, you may need to look at other debt relief options. A thorough review of your circumstances with a California bankruptcy attorney could reveal your best course of action.