'Planning and budgeting' is effective when it comes to reducing debt for one main reason...
In other words, it makes you budget what you are going to spend on everything before you actually go out and spend it. And it is no a coincidence that most people who find themselves deep in consumer debt have never planned or budgeted. Actions like balancing your check book, or reconciling your finances after the fact, will help you get some idea of where your hard earned money is going, but these things don't help you get out of debt or stay out of debt.
It is no coincidence that if you were to decide to seek the help of a credit counselor, that one of the first things that they would do would be a full assessment of your finances, followed by a budget. Credit counselors help millions of people every year to get control of their money and get out of debt. And planning and budgeting is an essential part of this process.
Sidebar: Are you struggling with your credit card debts, and other
consumer debts? If you are, then one of the most important things you
can do is work through understanding why you are getting into
debt and where your money is going each month. And a professional
credit counselor can be extremely helpful with this. Hey, like I said,
they help people out of situations like yours every day.
Chances are, your situation is one they have seen before. And in case
you are thinking that people who seek out credit counseling are
unemployed or on welfare, think again. The average income
of people who sought help from a debt counselor last year was just
under $50,000. And, the initial consulting and
financial analysis they do for you is free, with no further
commitment on your part.
Unfortunately the word "budgeting" has almost become a four letter word in our society. At the very least it is associated with depriving yourself of things and living a meager life. Well, although it is true that to live within a budget means you can't have everything you want, when you want it, it doesn't mean that you can't live a comfortable and enjoyable life. In fact, many people who create and stick to a budget find that they can actually have and do more of the things that they want. Why? Because budgeting identifies all of the areas in which you are spending your money, and allows you to shift your spending from unnecessary things that you didn't realize you were spending your money on, to things that give you more satisfaction. Like building a retirement fund or going on a vacation.
Although you can seek help with your planning and budgeting, sitting down and dong it yourself can be a very enlightening and empowering. The first thing you need to do is grab a fresh sheet of paper and a pen. Now, start to list all (and I do mean all) of the things that you spend money on throughout the year. Yes year. You don't want to forget things like birthday gifts, holiday gifts, that annual vacation, your car insurance that you pay once a year, etc. And on the other end of the spectrum, don't forget that daily Starbucks coffee or similar vice.
I'll tell you what... just doing this simple exercise will be a huge eye opener for you. As I mentioned earlier, going through the steps of planning and budgeting can help you identify areas where you can shift your spending. In fact, I would not be surprised if, by going through this planning and budgeting process, you were able to identify 10% to 15% in potential cost savings per month.
Once you have identified each area of spending (you may want to group some things you spend money on together under one "category"), write down an amount that you spend on that area each month, and then add it all up. Is it more than you earn each month? If it is, and you are finding yourself deep in credit card debt, (and getting deeper), then at least you know why, and that is an important step in the debt reduction process.
You've run the numbers and at this point at least you know where you stand financially. Now it's time to put this into action. How do we do that? Well, you need a budgeting system. The best budgeting system that I know of is called the envelope budget. It worked for your Grandmother, and it will work for you. You can read more about how it works and how to set it up here.
Setting aside money to pay down your credit card debt and other personal debt, is a big part of this planning process. Most people who have excessive credit card debts struggle just to make the minimum payments each month, let alone make significant strides towards getting rid of that debt "someday". Unfortunately, if all you do is make the minimum payment on your credit card debt each month, at an interest rate of 19%, it could take you the rest of your life (50 - 60 years, and I am not kidding) to pay off that debt. That flat screen TV you bought on your credit card will be in an antique store by then. And if you have missed payments or have been late with payments already, your interest rates are probably much higher, and you have had penalties and fees added to your balance to add insult to injury.
What to do. What to do.
You need to do two main things. First, find more money to put towards paying down those debts. Your planning and budgeting efforts should provide you with some extra cash. Second, get the interest rates on your debts reduced as much as possible.
By combining these to things you will begin to make strides towards debt elimination. One of the best ways to achieve these two goals is to seek the assistance of a credit counselor. I mentioned earlier that they can help you put together a budget, but they can also work with you to help you get the interest rates that you pay on our credit cards reduced significantly. And those late fees and penalties? They can work on getting those taken off your accounts as well.
Those who are successful in life, tend to be proactive. Being proactive with your money by planning and budgeting will be a big step forward in having success in this area of your life.