Debt Management Plan: Step Five

5. Establish a Budget

What is your goal?

The first step in establishing your budget is determining what your goal is. The essential element for creating a goal is that it is limited and specific objective that you can achieve. 

Write it at the top of the budget “Goal: pay debt off in eight years by paying $300 dollars a month on debt.” 

Create the Budget

After creating your goal of what you want to accomplish the next step is to create the budget.  You will need your decision matrix, your debt consolidation information, and your listing of expenses that you have determined you can reduce, and your monthly average of expenses by categories. 

To help you through this process we will again use Mr. Smith as our example.  To start, Mr. Smith creates two columns in the excel spreadsheet with his monthly income listed at the top, his goal listed as an expense line item and a total at the bottom.  Mr. Smith has set his goal.  Through working with a LoseDebt.org debt coach and a loan officer he determined that he would be able to pay off this debt in 8 years by paying $300 dollars a month.  He would first transfer the balance to an interest free credit card for 12 months and then with a home equity line of credit pays off the credit card.  After that he would pay the line of credit off in seven years.  In addition, by refinancing from credit cards paying 18% in interest to a home equity loan at 5.5% interest, he discovered that he would save approximately $44,000 in interest.  Also, he discovered that the interest from the home equity loan is tax deductible when in the past he was not able to deduct his credit card interest. 

Mr. Smith starting creating his spreadsheet with his monthly income listed at the top and his goal listed as an expense line item with a total at the bottom.  Mr. Smith also wanted to have some extra cash available in case of possible overruns and so that his cash account would not be near zero dollars every month he added a buffer of $300 to his budget. See his spreadsheet here.  This left him just over $2,000 to work with in creating his budget categories. 

Next

Mr. Smith then decided to add budget items from his expense matrix.  He decided to go in the following order to make sure he covers the most important things first:

1. Fixed-Needs
2. Variable-Needs
3. Fixed-Wants
4. Variable-Wants.