top ten tips for paying off debt

Top 10 Tips For Paying Off Debt: Establish a Realistic Budget

In Top 10 Tips For Getting Out Of Debt Series by Phil McGilvrayLeave a Comment


Video Transcription

Hi guys, Phil McGilvray here from Grandma’s Jars. Thank you for joining us. Today we are looking at tutorial 3 in our ten part series, our top ten tips for paying off debt. Tutorial 3 we are focusing on the importance of having a budget, a realistic budget. Budgeting is what we are about here at GMSJ and I am excited to be bringing this tutorial to you. I’m not going to go through the budgeting in great detail – that’s for another day, another series. Certainly we have a lot of information on our website, so if you need any help with it, please don’t hesitate to get in touch with us.

What a Budget Will Do For You

Today what I want to talk to you about is the importance of a budget to the debt reduction process. What I’m going to start with is three really key reasons of what a good budget will do for you as you strive to pay of debt.

#1: What You Need Set Aside for Future Bills and Expenses

The first one here is that budgeting will tell you what your expenses are, what expenses you have coming up. Too often we budget by looking at our bank account, if there’s money in there we spend it, if there’s no money in there we can’t. The problem with that is a bank account will not tell you what future expenses you have got coming up. A budget will. A budget will tell you when your car registration is due, when the rent is due, when the electricity or gas bill is due. And it will tell you exactly how much you should have set aside for those bills. So that allows you to look at your bank account and go “ok, I know I have 1,000 dollars in my bank account but X amount of it needs to be set aside for these upcoming expenses.” So that’s the first thing a budget will do for you.

#2: What You Can Afford To Spend

The second thing is a budget will tell you is what you can afford to spend. It’s not all just about what you can’t. Very often I find that people don’t want to budget because they are afraid it’s going to take away their freedom to spend. It’s gonna tell them they can’t spend, rather than give them freedom to spend without guilt. So when we set up a budget, it’s not just about the bills, as we will see in just a moment, it’s also about allocating for fun stuff, for the more discretionary things we’ve got. So knowing how much we got set aside for clothes or for holidays or for hobbies and evenings out and so on. Having money set aside for that allows us to spend it, allows us to spend it guilt free. So that as long as you are within those boundaries of what’s allowed, you know you that can spend it and not have to worry about how you are going to cover the future bills.

#3: Help You Quantify a Surplus

The third thing a good budget will do is quantify a surplus. And this is really important because without a good surplus there is no paying off debt. And we will often see people who feel like they have made progress with the budget this month. They will stick money into savings or they will pay money off their debt, but the next thing they know is they have to pull that money back out of their savings or they are putting money back on their credit card because some bills have turned up. So what happens in that instance is that people putting money aside thinking it’s savings but really it’s just money they are going to need for a bill next month or the month after that. A good budget is going to help you identify – “well after I have taken all my expenses in account, how much do I really have spare that I can put towards saving money or put towards paying off the credit card?” And that’s a really important thing to be able to do if we are trying to get out of debt.

The Basics of a Budget

What I want to do know is just take you through the basics of a budget. A budget starts of course with understanding our income. If you are a couple, it’s really important that you understand this as a couple not as two individuals. That you understand what is our combined household income? And you will notice here that I have also got it up as monthly income. We encourage all of our clients at Grandma’s Jars to budget to a monthly cycle. We’ve written a blog that you can see on our website but just a quick couple of reasons why we do that.

Why we budget to a monthly income: Most bills come as multiples of month

The first is that most bills come as multiples of month. So you know, there’s quarterly bills, monthly bills, annual bills – but they are all multiples of a month. And by having your income as a monthly figure, we also convert all your expenses to a monthly figure, you are not only cutting down on a lot of fiddly work that is involved trying to work things out if it’s on a weekly basis or a fortnightly basis. But you’ve also got a really good platform for comparing directly monthly income with monthly expenses, therefore we have X amount as monthly surplus or deficit.

And one of the things that most people struggle with is, “how do I reconcile with a fortnightly income with a weekly expense or a weekly income or fortnightly income with an annual expense or a quarterly expense?” People can often be tied in knots trying to figure all it out. But by converting everything to a monthly figure, it smooths those kinks out and makes things a lot easier for you.

Why we budget to a monthly income: Reconciling your budget with your bank account

The other reason we budget to a monthly figure is that at the end of each month we try to reconcile your budget with your bank account. At the end of each month is the obvious point to do that. It’s a set date every month. Whereas if you are doing it weekly or fortnightly it can be difficult to stay on top of that, you have to do it 52 times a year if you are doing it to a weekly cycle instead of 12 times a year if you are budgeting to a monthly cycle.

So that reconciliation process of identifying how much we have left in the budget versus how much we need in the bank account is an important part of the process. So we budget to a monthly cycle.

Identify Your Expenses

We also identify all of your expenses. It is so important that you identify every single one of your expenses in this process. It is very easy to identify how much we spend on the big bills. The gas, the cars, the car registration, the car insurance, the electricity, the rents and so on. Where people really struggle is “how much do I spend on gifts? How much do I spend on holidays? How much do I spend on clothes?” People just don’t know those sorts of things, so this process is really important for doing that. On our website we have worksheets that you can use. There is a really beautiful prompt sheet to help you identify “what are my expenses.”

Catergorize Your Expenses

You need to then categorize the expenses. It’s what we call Jars, and Jars are just an expense category.

So in this instance – everyday is all of your everyday spending so groceries, petrol, parking tickets, take away, cigarettes, alcohol, bought lunches, coffees – that’s all in that category there that you are allowed 1500 dollars a month for.

But if you go through you see that we’ve got utilities – which is gas, electricity, rates, etc. – and normally we have some in between 15 to 20 jars, but for the purposes of this tutorial we have abbreviated the budget so you have ten expenses in here. You may have more, you may have others, that’s not the point – have a look at the worksheets.

What we want to look at here is we’ve got these categories of expenses, which is us putting aside once for all of our future expenses so when those bills and expenses turn up we have the money sitting there to pay it. And we’ve added all of those up and it comes out to $5,538, our monthly total expenditure, allocated to Jars each month, and we have a monthly income, which leads us with a surplus of $1,112 dollars a month. This surplus is like gold, this is why we budget, this is why we work. We work in fact so we have some money left over at the end of each month. This money, knowing that all of our expenses are taken into account, is truly spare. We know that we can put if off into our savings, pay off our debt, with the expectation that we are not going to have to pull that back out because all of our expenses are already taken into account.

Video 4: Identifying the Surplus

One of the things we will talk about the next session, in tutorial four, is the importance of having a cash reserve, because we can budget for 95 percent of the expenses but there always gonna be 5 percent we can’t budget for. So using these surplus funds in the first instance for a cash reserve so we got that 5 percent covered as well is really important.

This – identifying the surplus – is why we budget. This is what we are going to use to build our debt elimination plan. So with this we can figure out how long will it take to pay off our credit cards, how long it will take to pay off our mortgage. We can set ourselves a roadmap using these funds here. So that is a budget, that’s the importance of a budget, it is crucial if you really want to get on top of your debt. We use it everyday to help people get themselves out of a hole they are in, start  to build savings, pay off their lifestyle debt, and move forward in a very strong way. You will be surprised that once you identify the surplus just how quick you can get on top of things.  

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