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Best Ways to Budget and Prepare Financial Planning to Get Out of Debt
- Tips on how to budget in order to get out of debts
- Importance of financial plan for debt reduction
When you decide to get involved in any sort of credit and commit yourself to any financial obligation, one of the main aspects to consider is budgeting and planning of your financial position. This means that you better prepare yourself in advance and think of financial plan for debt reduction in the future in order to avoid running into difficulties of consistent repayments. This is in the ideal world. In the real, however, many of the borrowers are lured by the idea of affordable unsecured credit and forget to prepare a financial plan that models future expectations of income and expenses and the potential for debt repayment.
So what to do if you ended up with a significant chunk of debt on your personal ‘balance sheet’ and do not know how to reduce your liabilities to the financial providers. Here are some debt reduction ideas that you can relate to that will help you to prepare your own financial plan for debt reduction.
Graph 1: Monthly Personal Balance Sheet for Financial Planning
First of all, prepare detailed ‘balance sheet’ of all your assets, income, equity on one side and liabilities to third parties such as bills, mortgage repayments, personal loan repayments, credit card payments on the other side. Some of your assets will be one-off and some will be ongoing such as salary. A good idea is to split the asset side of your balance sheet on current and long-term assets.
This means defining exactly how much cash you have at hands and other assets that are very easily cash convertible such as any foreign currency, checks, etc. By doing this you will know for sure how much you have for the immediate use, should you need it. Then define how many other assets you have that are not immediate necessity and can be relatively easily sold such as motorcycle, wedding dress, some furniture, etc.
After you have done that calculate how much equity related to your home you have. Your home has possibly increased in value over time and you have already repaid a significant chunk of your mortgage. These are the financials that you can rely on when you build your financial plan for debt reduction. The next step is to calculate how much of debt obligations you have apart from other regular expenses. These are likely to be your monthly credit card repayments, mortgage repayments and other. There is an example of personal balance sheet in Graph 1. Now when you have both sides of your balance sheet, you can budget to get out of debt.
The next step in your financial planning is to create a timeline of your debt reduction. Deduct the amount of cash you can potentially receive from utilising (selling) all the liquid assets you have calculated on your balance sheet. Yet, be realistic, if you think that selling motorcycle takes approximately 3 months, allow around 1 month for error and assume that you will sell it in 4 months instead. The same assumption is applied for the price of anything you sell. Always consider downside scenario in your financial planning. The money generated from liquid assets would go for the immediate reduction of your debt principal payments.
Now you have the actual figure of debt that you would own to third parties. The next step is to calculate how much you are due each month on your financial obligations such as interest and principal repayments. If you are still in trouble repaying it, one of debt reduction ideas is to consider debt consolidation. Enquire about the options available to you and compare your current financial plan with the plan that incorporates debt consolidation. The idea of debt consolidation would be to provide you one loan secured on the equity of your house that would allow you to repay all of your outstanding debts and make monthly interest payments affordable.
Needless to say, that preparing financing plan may seem as a tedious process, but at the end of the day it is very likely to structure your debt reduction process and allow you to make reliable financial planning for your own debt repayment.