Debt is a reality for many people, and unfortunately, many individuals who are in a lot of debt don’t know how to get out of it. The good news is it can be a relatively simple matter to start digging your way out of debt provided that you have the right tools. Here’s what you need to know about paying off your debt, including how much money you should take out of each paycheck to pay it off.
Create a Budget
Many people get into trouble with their money because they don’t create a budget, or they create a budget that they can’t stick to. If you’ve never created a budget before, then you want to start your debt-reduction strategy there. One simple budget to follow is the 50/30/20 budget.
Here’s how it works. Half of your paycheck will go to your necessities. These are living expenses, like food, shelter, and utilities. Next, you’ll earmark 30% of your budget for entertainment, shopping and the like. Finally, 20% of your budget should go toward debt and savings in this plan.
Stick to Your Plan
If, for whatever reason, the 50/30/20 plan doesn’t work for you, you may want to try the 28/36 rule. This rule works for people who need to align their financial recordkeeping more closely with industry standards.
Here’s what this means. In the financial world, it is recommended that people spend no more than 28% of their income on their household expenses. Additionally, no more than 36% of their income should go toward the payment of debt. This includes debt for cars, mortgages and credit cards.
Mortgage companies and banks follow this rule, so if you think you’ll be in the market for a big-ticket item, like a home or a car soon, then you may want to adopt this method of budgeting. If you pick the 28/36 rule, you should be consistent. Don’t deviate from it. It’ll be easier to have conversations with your bank come loan time.
Put Extra Cash Toward Debt
If you want to make your debt go away faster, then you’ll want to help the process along. There’s a simple way to do it. Any time you get extra money, like a refund from the IRS or money for your birthday, then put that money toward the debt.
You also have the option of netting yourself another paycheck by getting a second job. If you do this, then you’ll continue to allocate your “main” paycheck according to your original budget, whether it’s the 50/30/20 budget or the 28/36 rule. However, you’ll apply all of the money from your second paycheck to your debt. This strategy is particularly helpful if you’re deeply in debt. Psychologically, you’ll feel a bit better because you’re getting your debt under control faster.
Getting out of debt requires discipline and a plan. There are many effective budgets, like the 50/30/20 plan or the 28/36 rule, which allow people to get a handle on their debt. What isn’t effective, however, is to have no budget at all. Keeping a budget allows you to know where your money is going so that you’ll never get into debt again once you’re all paid off.
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