Step 3 of Debt Elimination

Finding 20%

You’ve completed Step Two. You should have the current expenses all laid out. You know every dollar that comes into your possession every month. You’ve taken your income and subtracted out your current expenses and you know what’s (or what’s not) left. You know all the balances and interest rates on all of your debt.

Look back at the budget you created in Step One. Did you have any money leftover after you calculated everything that you spent in a month? Most likely there’s not much left if you have debt. If there is a substantial amount leftover and you’re scratching your head trying to figure out why you’re in debt in the first place, your budget is missing something. That extra money is going somewhere.

Next is to create the New Budget. You have had some time to dwell over your current budget. What can you take out or decrease? Some choices may be a bit painful at first. Some people may find it impossible to cut anything. I can say that you have three choices – You can cut spending or You can earn more or You can do both.

You want at least 20% of your income free to tackle your debt. Your budget should only use up 80% or less. Does it feel impossible to free up that much? Have you thought about side hustles to eliminate this debt quicker? Side hustles don’t have to be a forever thing.

If you bring home $6,000 per month for example…$6,000 x 80% = $4,800. You should aim for your expenses to be NO greater than $4,800.

Here’s the budget calculator again so you can create a new budget that frees up 20%.

What is your new total? More importantly – What percentage of your total income does your total expenses take up? The goal should be 80% or less.

If your expenses are more than 80% of your income, we go back to our original three choices – You can cut more spending or You can earn more or You can do both. I will say that none of these cuts have to be permanent. It all depends on how dedicated you are to paying your debt off faster. If you feel you can live off of a super low food budget to get this ball rolling, go for it! It’s up to you what you “sneak into” the budget or what your priorities are. I will say to make sure you keep some type of entertainment line item in your budget.

Play with the budget and see if you sold a car or maybe got a roommate how much that would save you. Look at similar careers in your area and see if there’s potential for a pay increase. There are multiple ways to go around this – Focus on the 80% spending budget and see what corners you can cut to get there.

What You Should Now Know

• You have your past budget clearly spelled out. You know where every dollar has been going.
• You know how much you are bringing in each month after taxes and any current retirement contribution.
• You know how much (or little) you have left each month after your total monthly income comes in and all expenses are paid out.
• You know the full balance on all outstanding debt.
• You know the interest rate on each outstanding debt.
• You’ve looked into your housing cost and made sure that it does not eat up more than 30% of your take home pay.
• You’ve created a new budget that allows spending of only 80% of your take home pay.