How to Budget Your Finances While in a Lot of Debt

Plan your budget together to eliminate misunderstandings.
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Some people -- OK, a lot of people -- think 'budget' is a dirty word. It's almost as if a budget is a pair of handcuffs that keep you from having any fun with your money. The truth is, if you don't have a budget you are probably living up to, or even above, your means. If you are handling your money wisely without a budget, you can make your money go even farther. If you are already buried in debt, a budget could be your saving grace.

Step 1

Determine your current financial situation. Just like planning a trip, you have to know your starting point before you can figure out how to get to your destination. First, create a balance sheet. You can do this on a computer spread sheet or on a sheet of paper. List all of your assets in one column and all of your liabilities in another. Total both columns, then subtract your liabilities from your assets. If the result is a positive number, you have a positive net worth. If the result is a negative number you have a negative net worth. This can easily happen if you carry a lot of debt, or are upside-down on your home mortgage or car note.

Step 2

Figure out how you spend your money. If you don't have a budget, you are more likely to spend whatever you have available, and you might not even know where all your money goes. Keep an expense diary for a month and record every purchase you make and every bill you pay. At the end of the month break down your spending into categories, which might include housing, transportation, food, clothing and entertainment.

Step 3

Create a monthly cash flow sheet. List all of your monthly income from all sources, including your salary, commissions, dividends and interest payments, in one column. List all of your monthly payments and living expenses, such as your rent or mortgage payment, car note, food, utilities, entertainment, insurance and transportation costs, in another column. Total both columns, then subtract your expenses from your income. If the result is a positive number, you have positive cash flow. This is good. You can use that money to pay down your debt. If you have a lot of debt, chances are the result will be a negative number, resulting in a negative cash flow. You are living above your means and getting deeper in debt every month and you need to make some immediate and significant changes to your financial situation.

Step 4

Separate your expenses into three categories -- Needs, Wants and Negotiables. Needs are your necessities. These items include any expense that you are obligated to pay, including your rent or mortgage payment, utilities, food, gas money to get to and from work or school, minimum payments on student loans and credit cards. Wants are things that make your life easier or more enjoyable, but you can get along without them. These items might include your cable bill, unlimited texting on your cell phone bill, that $5 latte you get on your way to work every morning, and your membership at the local health club. Negotiables are items that might be necessary, but could be substituted for a less expensive item. For example, you need a car to get to work. You want to drive a luxury car, but an older model used car will get the job done. Reduce or eliminate any unnecessary items before creating your budget.

Step 5

Use the information you have accumulated to create a workable budget. The operative word here is 'workable.' An unrealistic budget will never work and you will just feel like a failure. Start by listing your available monthly income at the top. List your monthly expenses one by one, beginning with your necessities. List your debt obligations from biggest to smallest by their minimum monthly payments.

Step 6

Choose one debt that you want to pay off first. This may be the credit card with the highest interest rate, or it may be the loan with the smallest balance. Paying off your high interest credit card will save more money in the long run, but paying off a debt sooner might give you the added confidence you need to keep going. Make minimum payments on all of your debts except your targeted debt. Pay as much extra on that one debt as you can each month until it is paid off. Target another debt and begin making extra payments on that one. As you pay off one debt, you will have additional funds to pay on the next debt, which will allow you to pay that debt off even sooner.

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