Debts & Budgeting

To pay off your debt, you must examine how you spend money and create a budget to accommodate larger payments to your credit card companies and other lenders. Understanding where you are financially can be revealing, perhaps frightening, but once you understand your spending behavior, you'll be in a better position to create a realistic budget and tackle your debt.

Listing Your Debts

Before you create a budget, your must review your debt picture. Debt utilization is the amount of debt you're using in relationship to the amount of credit available to you, and is a key factor used in calculating your credit score. By ordering your complimentary credit reports from each of the three main credit reporting agencies -- Equifax, TransUnion and Experian -- at www.annualcreditreport.com, you will be able examine your credit history, catch and amend mistakes and purchase your credit score separately. Incorrect or out of date information can lower your credit scores, preventing you from getting the best possible interest rates on new loans or for qualifying for new credit.

Spending

Once you understand your debt picture, you will be ready to formulate a realistic budget enabling you to direct more money toward reducing your debt. To create a budget, track your expenditures for a week, including eating out, coffee, tolls and other small expenses. Multiply that amount by 4.3 to get an idea of how much you're spending on out-of-pocket expenses each month. Add that to any recurring monthly payments you make, such as utilities, cell phone, rent and other bills, to come up with an estimate of how much you're spending each month.

Income

Compare the outline of your monthly spending with your net income to discover where you've spent money on frivolous items. It is vital to review your expenditures to determine how you can free up more money to tackle debt. For example, if you regularly purchase new books, consider utilizing your local library or joining an on-line swap club. Rather than buying coffee from a cafe everyday, make your own. Small changes have a big impact over the course of a month and the money you save can be redirected for debt reduction.

Considerations

You can pay off your debt in one of two ways. The first way is through the debt snowball plan, where you pay off your debt by tackling the lowest balance first. The theory with this method is that you will see your increased contributions reducing your debt quickly, helping you to stay motivated to go after your remaining debt. The other method involves paying the debt with the highest interest rate first, getting rid of the most costly debt before moving on to the next highest interest rate debt. Either option enables you to focus on paying off one debt at a time until all of your debt is gone.