Debt Reduction Plan: How to Trim Your Budget

We’ve talked about the importance of budgeting and financial stability, but you may still be thinking “easier said than done.” So, how does a family learn to cut back? Review the real-life example below to help you transition. What you learn will allow you to focus on credit repair and prioritize savings. You can’t lose.

Scenario

Greg and Marissa Drake are a married couple in their early 30’s. They have two children and earn $105,000 per year. Their budget consists of the following monthly expenses:

Net Income

$6,300 per month

Expenses

• Mortgage, insurance and property taxes: $1,375
• Electric and gas: $100
• Water: $55
• Trash: $35
• Food: $1,100
• Car payments: $475
• Car insurance: $225
• Gasoline: $200
• Mobile phone plan: $125
• Student loans: $155
• Health insurance coverage: $328
• Minimum credit card payment: $225
• Entertainment: $350
• Supplies and kid activities/school fees: $300
• Cable: $175
• Internet: $50

Total: $5,273

At the end of the month, the Drakes are left with $1,027—16.3 percent of their income. Their situation isn’t unusual; millions of families live paycheck to paycheck, exposing themselves to financial risk along the way. If you’re tired of making ends meet, consider the budget-trimming questions below. Ask yourself:

• What’s essential (and not)? The first step in budgeting is identifying essential and non-essential expenses. For example, would you call cable necessary? Here’s a hint: for $175, we wouldn’t. Review your budget and separate your expenses into two categories. This process will prepare you for the next steps.
• What’s flexible? After separating your expenses, it’s time to begin the financial trimming process. You may have noticed that the Drakes spend $900 on car-related expenses alone, a whopping 14 percent of their budget! Take a lesson from their overspending and learn to cut back. Try to reduce spending by 10 percent on flexible items such as car price (e.g., exchange a luxury car for an affordable model), gas (e.g., carpool with coworkers), utilities, food, entertainment and supplies. Using this strategy, the Drakes could save at least $300 per month.
• What’s missing? Budget trimming is best accomplished with a goal in mind. Review your finances and consider the missing pieces. For example, why don’t the Drakes have an emergency fund or a college savings plan for their kids? How will these missing items affect the family’s future? Establish three financial goals and create a plan to reach them. A new perspective will allow you to feel frugal and It’s a win-win.
• Is consumer credit hurting you? The Drakes have $7,500 in credit card debt, a sum they are paying off in $225 increments. How is credit card debt affecting your budget? Minimum payments are never effective. Accruing interest can balloon beyond 20 percent, forcing you into years of unnecessary expenses. If you’re struggling with similar issues, add debt reduction to your list of goals. Why waste your cash on interest?

The bottom line: Budgeting is a tedious process, but the rewards are worth the trouble. Practice preemptive credit repair by giving your finances the attention they deserve.