Trim a Budget and Pay Down Unsecured Debt

Face Credit Card Fears and Be Debt Free by Slashing the Budget

Aug 20, 2009 Armand Famiglietti

Take hold of finances and calculate an approximate budget and amount of total unsecured debt from credit cards and other bank loans. Then right the ship to get debt free.

Debt can be a terrible burden. The sleepless nights, constant worrying about how to make missed payments, calls from creditors harassing for no reason. While getting out of debt is not easy, it can be done. Here are some tried and true tips that can really help:

Steps to Calculating a New Budget

By putting pen to paper, one can visually see the expenditures coming in and the money flowing out. This is a healthy exercise for any household to perform from time to time.

  1. Write down all monthly expenses for the household. The only way to get a true picture of financial health is to be honest about the amount of money that goes out the door every month. This figure needs to include everything from the mortgage or rent payment, all the way down to the pack of gum bought at the gas station. Take some time to make this list to be sure that it is comprehensive.
  2. Write down all monthly income for the household. This figure should be the net income from all paychecks. Include alimony, palimony, down to the penny that is paid for interest in a checking account.
  3. Subtract the household expenses from the net Income. This seems like a simple step, but it is remarkable how many people never attempt it. The fear of seeing that result keeps people in the dark. Don’t judge that number, just know that it is there.
  4. Return to the monthly expenses and slash further. Now comes that hard part. One must determine what can be eliminated. This step will not be easy, but it is necessary. Start with the small expenses, the daily coffee (one cup a day will provide an extra $50 by months end), and move onto the larger expenses such as cable, internet and phone. Insist to find at least 15 percent to cut out of the monthly budget. This will be a tall order, but unfortunately so is the debt.
  5. Perform the subtraction of the new budget from the net income again. If this number is positive (meaning not losing money) and seems as if a dent can be made by placing this amount of money toward debt, then one is on the right track. If not, more must be cut from the budget, or the realization of getting an additional job must be considered.

Now that the household budget has been slashed, it is time to take those savings and apply it toward the debt.

Determine How Long it Will Take to Pay Down Debt

The following equation will give an approximate example (within a month or so) of the length of time it will take to pay down the total debt if the payment of the new household expenses is made every month.

  1. Add up all of the unsecured debt for the household. Leave out the mortgage, car payments, and student loans those provide deductions on a tax return or are considered secured by the asset. Again whatever the number comes to, $5,000, $10,000, $25,000 or more, don’t judge it, just accept it.
  2. Figure the amount of interest of each unsecured debt paid each year. If there is a finance charge on the latest bill, simply multiple that by 12 to learn the approximate dollar figure of interest one pays per year for that account. For instance of the interest is $60 on a particular credit card, then the account holder pays approximately $720 per year for that interest.
  3. Add the approximate amount of interest to the debt. As an example, if the three calculations performed garnered $2,000 in interest, then add that amount to the total debt.
  4. Set the timeline one wishes to pay down bills. Make this a goal for the family. The sooner the better as less interest will be paid. Calculate this number in years, not months.
  5. Multiply the total amount of interest by the number of years one wishes to pay down bills. Using the above example, if the game plan is to pay the debt in five years, then $2,000 must be multiplied by 5. This would result in $10,000 extra. This is the approximate interest
  6. Add the approximate interest figure to the total debt. This new number becomes the total amount of payments to be made over that course of time.
  7. Divide the total debt by the extra money squeezed from the new monthly budget. After providing this simple division, the answer will be an approximate estimate of the amount of months until the debt is paid off, if this payment is made every month.

These tips can empower a family looking to pay off bills. Stick to the plan and check in with the budget every so often to make sure the family is staying on track.

Tips

There are a few tips that one may employ that will help when trying to pay down large chunks of debt.

  • Call each creditor and try and lower the interest rate. This may or may not be a long shot depending if the account is current or not, but asking the creditors to lower the interest rate is one of the best ways to pay off debt faster. Just 3 percentage points on 10,000 of debt saves $300 a year. On a five year plan, that would save $1,500 over the course of that time.
  • Transfer balances. This is an addendum to the previous suggestion, however, check for sneaky transaction fees that often add 3% to the deal. That means a 1.99% transfer is really a 4.99% transfer.

The copyright of the article Trim a Budget and Pay Down Unsecured Debt in Personal Budgeting/Finance is owned by Armand Famiglietti. Permission to republish Trim a Budget and Pay Down Unsecured Debt in print or online must be granted by the author in writing.
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