Below you will find a guest post from Andy Masaki of www.PennyLessDad.com
How to budget and clear debts while living paycheck to paycheck!
Paying off debt is difficult!
Living paycheck to paycheck is also difficult!
So how can we merge them?
The best part is, doing so might not be as difficult as it seems at the first sight! All you need is a nice and effective budgeting strategy.
In this post we shall try to figure out how to budget and pay off debts while living paycheck to paycheck.
First you should plan to live a better life.
It’s actually good that you are concerned about your paycheck to paycheck lifestyle and aim to pay off your debts by formulating a budget.
But only being concerned will not help you in the long run. There should be initiatives from your side to live a better life, so that in future you are not worried about living paycheck to paycheck.
Here are few things you can do to find a permanent solution to your upset financial situation.
• Find a job that pays well:
Try your luck to get a job that will bring in more money and will also give you peace of mind!
Even if this new job seems to be better off as a side job, then no harm at all. If you can easily manage two jobs at the same time, then don’t be lazy and spend your days in procrastination!
Also how about your own business? Anything that you wanna go freelancing about? Any hobbies of yours that can turn out to be a good source of income?
I am a big time supporter of freelancing and entrepreneurship. Having your own business means a lot. Only you need to switch from your job to your own business properly.
• Try to have two breadwinners:
If you are married, then motivate your partner to get an income.
Having two incomes will leave your family enough money to budget with.
Also if you have grown up kids, who are in their teens, they can also get a job and help you loosen up your finances a bit.
• Mend your lifestyle:
There are several things you can do to bring your finances straight. The first clever thing will be to understand your needs and wants!
Hence before you make a budget, before you plan to pay off debts, you must sort out your expenses as per their ‘needs’ and ‘wants’.
‘Needs’ make the first priority and should always top your list of expenses. These include grocery bills, utility bills, children’s education costs, transportation costs, loan payments and etc.
While on the other hand ‘wants’ come the second priority and they might not even make a place in your list of your expenses if your finance is tight!
Also you should try to avoid unnecessary expenses. They will only drain out money from you, and will leave you with regrets and empty pockets!
Now let’s see how to budget if you live paycheck to paycheck:
It doesn’t really matter whether or not you live paycheck to paycheck, when it comes to budgeting!
Whatever money you earn, you can practically budget it without much problem. For example, if I say, you earn only $1 per month, then you can save 20 cents, put 30 cents toward debt payments, and buy candies with the rest of the amount.
It sounds funny right?? But that was just an example to show, how it would look if instead of earning $1, you earn $1000, or $2000, or $4000. You see dividing your income properly and distributing it sensibly over your expenses is all budgeting is about!
• You can follow the 50-20-30 budget:
This is very simple. You divide your expenses into three parts.
50% for your day to day expenses or basic needs (these include groceries, gas costs, electricity bills, etc).
20% for savings. (But in your case I guess debt clearing is more important, so use this to pay off debts, or savings if it seems fit to you).
30% for luxury expenses or wants. (You can also use this for making extra debt payments or savings).
If this budgeting strategy is not that appealing, then try out the next one.
• The zero based backward budgeting:
This is an improvised strategy made specially for experts.
You first keep aside the amount you need for your debt payments. Say $500 each month.
Now if your income is $3000, then you are left with $2500 for your other expenses.
Now list down all your possible expenses for the month one by one, and assign fixed amounts to them. Prioritize your expenses. Your needs come first, then your wants!
Once you are done, add up those expenses to see whether or not they are covering your whole income. If your income minus expenses is zero, then okay, else find some other probable expenses for your remaining dollars.
If you can’t assign all of your dollars specific purposes, then use the remaining amount to do extra debt payments, or use it for savings.
Some nice ways to pay off your debts:
First thing’s first, you must know how to get out of debt fast with a low income, because you live paycheck to paycheck!
So the best thing for you to do, is apply a suitable debt payment method.
I can help you out with two of such methods, that really gave me good results in my past battles with debts.
One is debt avalanche, and the other is debt snowball!
An effective method, that helps you to deal with the most deadly debt first.
What is a deadly debt? One that has a very high interest rate.
So in debt avalanche, your first target will be to get rid of the debt that has the highest interest rate.
You start to make extra payments for this debt with the highest interest rate, while making minimum payments for the rest of the debts.
Debt avalanche is a bit time taking process, but it is fruitful in the sense, that it helps you clear the hungriest of all your debts first.
This method gives you a moral boost.
Unlike debt avalanche here you will target the lowest amount debt first.
You make maximum payments for your lowest debt, while making minimum payments for the rest of the debts.
The method works like this.
Suppose you have 3 debts:
Debt 1: $200
Debt 2: $300
Debt 3: $400.
And you are making $50 payments for each of your debts. With debt snowball, you start making extra payments for your Debt 1.
Let’s say, you are making an extra $50 payment for Debt 1, per month.
So your payment will look somewhat like this.
Debt 1: $100 payments- (you will clear it in two months).
Debt 2: $50 payments.
Debt 3: $50 payments.
Once you clear Debt 1, you roll the $100 payment to your Debt 2.
So now your payment will look like this:
Debt 2: $150 payment per month,
Debt 3: $50…..
You go on like this till all your debts are cleared.
You can also take help of online debt payoff calculators, to see how much you can save on your payments and in how less time you can clear your debts.
So that’s all I had to say about clearing debts with the help of a budget and a nice debt payment strategy when you live paycheck to paycheck.
But as I said earlier in this post, you should always aim to live a better life, with a better income, and with better money habits! If you don’t do that, then all these problems of yours will persist forever, and will only get worse day by day.
Author Bio: Andy Masaki is a blogger at Penny Less Dad and financial writer associated with the Oak View Law Group. He is a debt expert and a member of several online forums where he shares his advice as well as tips to lead a financially independent life.
Blog : www.PennyLessDad.com
Twitter | Google Plus | Facebook