Eliminate Credit Card Debt: Budgeting 101

In this article we will address the technique of budgeting and how it can help you get out of debt and get control of your finances. While some of you may be familiar with budget concepts and techniques already, for many it is a strange term that brings up a lot of uncertainty and in some cases a cloud of confusion. In reality, it is a very simple system that is easy to understand and implement, and if used consistently can work wonders in your financial life. So, if you’re ready, we will begin!

So what is a Budget? A budget is a PLAN, just like any other plan that people make i.e. vacation trip, list of shopping items to buy at the grocery store, list of tasks for the next day, etc. This plan helps you organize your finances in a table that shows current and future incoming and outgoing money, savings, investments and many other things… basically all your finances on a chart. The only difference is that the budget plan is expressed in numbers and in few minutes we will explore this in more detail.

You may say: sounds like a lot of work… do I need a budget? YES! While there is a certain amount of energy that has to be spent on creating the template, the payback is certainly worth the effort, for if done correctly this plan will keep track of your every dollar. If you know where your money is going it is much easier to direct it where you want it to go.

So by now we have established that the budget is a PLAN, your money plan! For the sake of simplicity we will use a one year term in all our examples, you can simply copy the layout when creating your own budget.

The “PLAN” is usually divided into three sub-categories: operating budget, cash budget and a capital budget. For the purposes of this article we will only focus on the first two.

Operating Budget is a plan for all your projected (forecast) income and expenses for a certain period, in our case 1 year.

Cash Budget is a plan for all the actual (real) income and expenses for that year.

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Here’s the example of an Operating Budget, it is easy to create and most of the modern computer software can be used. For people who are not computer friendly, this can be charted on the sheet of paper, just like 25 years ago.

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As you can see from the above example all you income and expenses are categorised in monthly categories for the full year ahead. You are probably thinking: how do I know what I will spend 6 months from now? and that is why this plan is called a forecast. You will use the historic data  to determine an approximate expenditures in the future. For the items like hydro, water, property taxes ect. that are billed quarterly simply average it out to obtain approximate monthly payment.

i.e. Hydro bill 159.00 for the months of September, October, November = 159.00 / 3 = $ 53.00

Just add the fields that are missing and delete the ones that dont apply, input your data and your done!

Here’s the example of the Cash Budget:

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As you can see the layout is exactly the same. However, the values are the actual numbers. At the beginning of the year you will create an operating budget that will show you a forecast of income and expenses for the year ahead, and as the months go by you input the real data in the cash budget. The cash budget than becomes your operating budget for the next year.

The fields in which the actual costs were different are highlighted in green and pink colours. Small variations can make a big difference on you final monthly net income and that’s why it is advised to have a budget plan in order to keep track of one’s money.

The fields can be tailored to your situation; variety of income streams; as well as expense fields can be inputted to categorize your money inflows and outflows. i.e. a saving field can be added in the expense column to save money monthly, an education fund column can be added to start an education fund, a newly bought item on the financing term, etc.

The budgets are used together, when you take a look at the forecast you will know how much money you have left over in December, and when you record data in actual budget you will know how far you were off and where you’ve gotten of track. The perfection is reached when your cash budget matches your forecast; but we all know that life is unpredictable so don’t stress to much over small variations.

So now you’re probably thinking…how do I eliminate my credit card debt using budget? Well, it’s real simple… Once you create your operational budget, which includes all the mandatory expenses, you will see how much money is left over every month and then you create a column for each of your credit card accounts at the end of the expenses list, i.e. below:

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After that’s done, you take every credit account and you break down the balance plus forecasted interest to calculate the monthly payment you need to make to pay it off in one year.

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You can follow the example above to estimate approximate debt cost. There is one condition; you cannot spend the money from the credit card.

Also, in some instances the left over income is not enough to cover all the credit payments; therefore you pick one with the highest interest rate and budget to pay it off in a year. As for the other credit accounts, include them in the budget but simply plan for minimum payments.

The final cash budget at the end of the year may look like the image below. However, you should strive to achive a positive cash flow monthly to avoid getting deeper in debt.

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The budget is a great tool to keep your financial life organized and managed. We hope that this article will bring clarity to your money matters, help you deal with your debt and keep you informed about your dollars!

We welcome questions and comments.

Your Debt Management Advisors,

CICA Team

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