Budgeting – a DIY debt solution

Are you one of the millions whose 'paper' salary and ‘real' salary don't match up? Do you earn enough in theory but not in practice? As a result, are your monthly debt repayments stretching your finances to the limit – or beyond, forcing you to take out more credit?

The good news is this: there is a solution to the problem – budgeting.

The bad news is this: it can take quite a lot of self-discipline.

Budgeting is all about income, expenditure, and closing the gap between the two.

Step 1 – theory

Write down everything you expect to earn / receive in a month. For most people, that's the easy it.

Now, write down everything you think you'll spend in a month. This is where it gets tricky.

First of all, there are some bills you don't pay every month. You'll need to track down all the paperwork, find the bills you pay every year or quarter and divide the numbers by 12 or 4 as appropriate.
Second, some expenses are hard to track – particularly discretionary spending such as eating out, drinks, cigarettes, snacks, etc. This is why Step 2 is so important: keeping track of the dollars is relatively easy, but the cents really add up.

(If you're not sure how to get started, it might be a good idea to get some professional debt help. There are plenty of organizations that offer free debt advice and help, whether you're looking for in-depth financial guidance or just a bit of help drawing up an ‘Income & Expenditure' table.)

Step 2 – practice

Spend a whole month writing down everything you spend. Tracking the 101 small expenses is critical – after all, you probably already know (more or less) what you spend on expensive things.

Step 3 – reflection

After the first month, take a good look at your notes. Go through your spending with a highlighter and mark all the expenses you could have avoided. Most people find they add up to a lot more than they thought.

On the one hand, it's depressing to see how money gets ‘wasted'; on the other hand, it's encouraging to see how much you could save if you really put your mind to it. Hopefully, this should give you the incentive you need to keep going.

Step 4 – calculation

Figure out how much you could save every month if you cut out everything you don't need.

Could you walk instead of driving / taking public transport?
Could you stop (or cut down on) smoking and socializing?
Could you stop buying luxury items (fashionable clothes, CDs, etc.) for a while?

Next, figure out how far you want to take your economy drive. This is a decision only you can make, based on what you know about your debts, your income and – perhaps most important – yourself.

Obviously, the more you cut back, the more progress you'll make in paying off your debts. If you don't think you could cut your discretionary spending by 100%, you can always reduce it by 75% or 50%, but of course you'll have to do it for longer to get the same results.

If you're looking for motivation, find a reputable online ‘repayment calculator' and see how much you could save by overpaying your debt repayments every month. (There are some kinds of debt that you can't overpay, but it's probably a good idea to focus on debts like store cards, credit cards and overdrafts anyway, as these tend to be high-interest debts which you can overpay.)

Step 5 – perseverance

Keep it up. Nobody likes economizing, so focus on the good points:

Make a chart of your debts so you can see how fast they're going down.
Set yourself targets (10% paid off, only $500 left, one debt paid off, etc.)
When you hit a target, celebrate!

Most of all, remember: however much money you're putting towards your debts today will one day be yours to spend or save as you see fit. Think about what you'll do with your income once it's entirely yours again.