Creating a personal budget plan really is a lot easier than it sounds. It takes a little bit of work gathering up the information on your earnings and expenses. Then you’ll need to do a little math to figure averages and your surplus (hopefully) or deficit (uh-oh) at the end of the month.
Some people think that the steps I just laid out are the budget plan.
Those steps, and the numbers they produce, give you your budget.
A budget is simply an accurate look at how much money you make, and how much you spend.
Do you still need to do this part? Read this article for in-depth instructions:
Your personal budget plan helps you figure out how much to spend, and where.
When you go through all of your income and expenses, and figure in only the minimum payments on debts, you can start to plan how to pay those debts off faster.
You can eliminate debts one at a time, and end up saving money in the process.
Each time you pay off a debt you can “snowball” the minimum payment from that debt into paying off the next one. When that gets paid off, you can snowball the minimum from the first and second debts into paying off the third.
You get the idea, right? Each time a debt gets paid off you have more money available to attack the next debt and pay it off even faster.
Just as long as you don’t pay off that first debt and think, “Cool! A $40 minimum payment gone! Now I have $40 a month to buy pizza and beer!” (No, I don’t know why you just became a frat boy. It was the first thing that came to mind. In my defense, I am a little hungry)
That’s what your budget plan is for. So you not only know how you are going to pay off the first debt, but have a plan in place for where that money will go when you do.
I know this can sound a little confusing, so I’m going to create a simple budget plan to show you how it works.
Sample Budget Plan
Average Monthly Income – $3,000
Average Monthly Expenses – $2,800
Average Monthly Surplus – $200
These numbers came from a budget worksheet that looks like this:
I know you have other expenses. Maybe heat. Definitely fuel for the car, plus insurance and registration. And you’ll have a little bit of money budgeted for extras, like eating out every once in a while.
But like I said, this is just a simple budget to show you how it works.
A few notes to keep in mind as we work through this example:
- We are only going to focus on the credit cards right now because they are the debts we want to get rid of first
- I am simplifying the interest process (a lot!)
- Credit card 1 will gain $90 in interest every month
- Credit card 2 will gain $30 in interest every month
- Credit card 3 will gain $10 in interest every month
- The minimum payments and interest charges are approximate to the balances
- We are going to use $150 of your surplus to pay off debt
- The other $50 of your surplus will go into savings
Ready to see how this works?
Did you see what happened? On Card 1 we paid $160, but the balance only came down $70.
Card 2 we paid $60, but the balance only dropped by $30.
That means out of the $220 we paid, only $100 went toward paying down the principal. The other $120 was purely interest!
But on Card 3 we paid $190, and the balance came down $180. This is the only balance that dropped more than the minimum payment.
That’s how credit card companies make money. A credit card is a loan, and the interest is how the bank stays in business.
If you have any credit cards with a significant balance, and want to do the math or find a payoff calculator, you’ll probably discover that if you only pay the minimum, the bank has you scheduled to be paying on that card for about 7 years!
You could end up paying between 50% and 300% in interest over what you borrowed if you stick to that schedule.
But we don’t want to pay that much interest. If we pay more than the minimum it gets paid off faster, and we save money.
Ready to see what happens next?
Look at that! Just 3 months in, and credit card 3 is already at less than half the original balance.
Let’s keep going.
Check this out! By planning what to do with your money, you just paid off a credit card with a balance of $1000 in 6 months. Paying just the minimum would have taken you about 3 years!
And did you notice that last payment? It went from $190 to $100. You have $90 leftover!
Put it to Card 2 this month.
Put it in savings.
Heck, treat yourself to a night out as a reward.
But only this month!
That’s where the planning comes in. Because you planned, you knew this card would be paid off soon, which would free up some more money. And that money would be split between savings and paying off the next debt: Card 2.
You can also plan on what will happen with the “leftover” money on the month that you pay the debt off completely. Like this month with the extra $90, you could have planned a nice night out as a reward to yourself. Or you could have planned to drop that extra $90 into the next debt you want to pay off and start the process a little sooner.
Planning is a powerful thing. So let’s look at how we can pay off the next credit card, and see just how powerful planning really is.
Let’s Pay Off Card 2
Your budget will look a little different now that you don’t have a payment for Card 3. You just got rid of a $40 minimum payment, so you can now add that to your surplus.
Your surplus just went from $200 up to $240.
In the last step we put $150 of the surplus toward debt and $50 toward savings.
Let’s stick with that 75/25 split.
Now we’ll pay $180 from that surplus toward debt (on top of the $60 minimum payment for Card 2), and put $60 toward savings.
I’ll go through this one faster, and just show how the balance of Card 2 goes down:
In 7 months, you paid off another card with an original balance of $1500 ($1320 after Card 1 was paid off), with $180 leftover.
I’m not going to go through month by month again. Instead, I’ll just give the highlights.
At this point the balance would be $3090.
Your new surplus is $300.
With your 75/25 split, that’s $225 on top of the minimum payment of $160 (total monthly payment of $385), and $75 to put into savings every month.
It would take you roughly 11 months to pay this card off as I laid it out here.
That means that in just 2 years you would have paid off $6500 in credit card debt that otherwise would have taken you closer to 7 or 8 years, and cost you about $8000 in interest (<— that’s a rough guess. I didn’t do the actual math because it will change drastically depending on interest rates, so don’t quote me!)
Did you keep track of how much you were putting into savings through that whole process? Probably not. You were too distracted by how fast that credit card debt was disappearing!
Let’s see how much you just put into your savings account in 2 years while paying off those credit cards.
During the 6 months it took to pay off that first card, you were putting $50 away every month.
$50 x 6 months = $300
Then you paid off the next card in 7 months while putting away $60 a month.
$60 x 7 months = $420
Next you paid off the third card in 11 months, putting away $75 a month.
$75 x 11 months = $825
$300 + $420 + $825 = $1545
So in 2 years, just by taking the time to plan the best use of your money, you not only paid off $6500 in high-interest credit card debt. You also built up a saving account with $1545!
That’s the power of creating a personal budget plan.
You don’t just look at what you’re spending now. You look into the future and see how that spending will change, and how you can change it to maximum benefit.
Do you want to pay off your debts even faster? Would you like to increase how much you can put toward savings every month? Maybe you’d just like to be able to get on track without making so many cuts? I know my answer to all of those was “Yes!”
That’s what really gave me the push to learn about ways to make extra money on the side, and ultimately led to building online businesses.
Interested? To learn more, read these articles:
- Learn Affiliate Marketing With Wealthy Affiliate – Review
- Create A Blog To Make Money
- Work From Home On The Computer
- What Is Affiliate Marketing About?
I know budgeting can seem a little intimidating at first. Even a little confusing. But with the right tools and a little help, it’s really quite simple.
The first step is probably the hardest. That’s figuring out your budget and being honest with yourself about your spending and what you really need to spend.
If you haven’t already, read this article for more information:
Creating your own budget and budget plan are two of the smartest things you could do if you really want to get on track to take control of your financial future.
So get started now!
If you have any questions, or need a little help, feel free to ask in the comments below. I’m not a financial adviser, but I can offer guidance based on my own experience and the help I’ve given to close friends and family. And if I don’t know the answer to your question, I will certainly help you find it.
Thanks for reading,