Through this recent series of articles, we have explored many aspects of how to create and adhere to a spending plan. However, this article will take a deeper look at several ways that a spending plan can help you deal with the heavy burdens of debt. Although this can be a daunting task, having a clear plan to become debt-free is the first step on the road to financial freedom.
Complicated Feelings About Dealing With Debt
Dealing with debt is a common financial challenge that each of us will have to deal with in our lives. However, finding effective strategies to tackle it can be daunting. One powerful tool that often gets overlooked in the journey toward financial freedom is a spending plan. Yes, that’s right – a spending plan, not a budget.
For years, the term “budget” has carried negative connotations, evoking feelings of restriction, sacrifice, and often failure. Holding on to these emotions won’t aid you in your efforts to become debt-free. In reality, they are probably hindering you from reaching your goals. But, reframing your financial strategy as a spending plan could transform the way you handle debt.
Learning how to create and adhere to a spending plan can be extremely effective in overcoming these emotions to help you manage your finances and ultimately overcome your debt.
12 Ways a Spending Plan Can Help You Deal With Debt
1. It will help you take the first steps to regain control of your financial situation.
The first step in regaining control of your debt is to understand the root cause of your problem. When you create a spending plan, it gives you a clear perspective of your spending habits.
In addition to identifying sources of income and financial obligations, it emphasizes the purpose of your financial decisions. As part of this process, you must establish goals and determine your priorities. If paying down debt is something that you struggle with, spelling it out through your spending plan will help you make it a higher priority. Recognizing the problem and making an action plan are the first steps in taking control of your financial situation.
2. A personal spending plan will identify your monthly expenses.
Spending plans serve as a magnifying glass for your financial habits. Therefore, it can help to identify where all your money goes each month.
When you take a closer look at your expenses, it will also allow you to differentiate between essentials (rent, mortgage payments, utilities, groceries) and discretionary spending (entertainment, dining out, etc.) Identifying these habits will enable you to prioritize your essential spending while minimizing discretionary ones. If you are able to reduce your discretionary expenses, it will free up more funds that you can reallocate toward debt repayment.
3. It forces you to prioritize your spending.
As you sort through your monthly expenses, categorizing them will make it easier to distinguish between essential expenses and discretionary spending. Once you understand which habits are helping or hindering progress, it becomes clearer what you need to do in order to pay down the principle on your debts.
It will also help you to prioritize debt repayment. Assigning a portion of your monthly income toward this goal will ensure regular and consistent progress.
4. Spending plans will help you allocate your resources wisely.
Learning how to allocate your resources effectively is an important aspect of how a spending plan can help you deal with debt. Setting aside a portion of your income toward debt repayment becomes more manageable when you have a visual roadmap.
Automating this step will also help you to continue making good financial decisions. It ensures that you consistently dedicate a specific percentage of your income to clearing debts, reinforcing your commitment to becoming debt-free.
5. It is an effective tool for tracking expenses and accountability.
Many of us are visual learners and need to see a plan before we can internalize it. Therefore, creating a spending plan and tracking your expenses is one of the most effective tools for correcting irresponsible spending habits. Not only will it guide your spending habits, but also hold you accountable for your financial decisions.
Recording your expenses will help you understand where you might be overspending and make it easier to adjust your habits. Regularly reviewing your expenses will also encourage responsible financial behavior by making you more aware of your choices.
6. It will help you establish emergency funds and contingency planning.
Part of your spending plan should also include proactive financial management with emergency funds and contingency planning. This step will ensure that you have a financial safety net in place when you need access to funds for unexpected events like medical emergencies, expensive car repairs, or sudden job loss.
Having these reserves in place will prevent you from falling deeper into debt when unforeseen circumstances arise. Furthermore, it allows you to make adjustments without compromising your other financial obligations. Planning for these contingencies will not only help you avoid accruing more debt but also create more long-term financial stability.
7. Having a spending plan will help you implement debt reduction strategies.
Another facet of how a spending plan can help you deal with debt is through debt reduction strategies. When you evaluate what kind of debt you carry, it can help you implement various strategies to help you get out of debt faster.
For example, you may adopt the snowball method of paying off the smaller debts first. Others choose the avalanche method which prioritizes high-interest debts. Whichever approach you prefer, your spending plan will ensure the appropriate allocation of funds to execute these strategies effectively.
8. It will help you avoid accruing additional debt.
With your spending plan firmly in place, you have a clear understanding of your financial capabilities and limits. In addition to helping you pay down your existing debt, it will also help you avoid taking on new ones.
Establishing your emergency funds and reducing your discretionary spending will ensure that you have enough to meet your monthly obligations. And most importantly, it will make you more mindful of your spending patterns and how they affect your financial goals.
9. Adopting a spending plan will help you improve your credit score.
When you adhere to your spending plan and make consistent debt repayment, it positively impacts your credit score. In addition to reducing your credit utilization, it also creates a longer history of timely payments. Both of these factors will positively impact your credit profile.
Not only will this drastically improve your credit score, but it could potentially grant access to better terms and financial opportunities in the future.
10. It will cause behavioral change and foster greater financial discipline.
Although many of the points covered in this article focus on the financial aspects of how a spending plan can help you deal with debt, there are also psychological components to consider. A spending plan is not only a tool for managing your money; it also encourages a shift in mindset and a long-term change in negative behaviors.
Over time, adhering to a spending plan cultivates greater financial awareness and discipline. In addition to encouraging wiser decision-making and saving habits, it will also help you from falling back into old patterns that led to the initial debt accumulation.
11. Reducing your debt will also facilitate better stress management.
The burden of debt is a heavy one that impacts your finances, relationships, and mental health. However, the physical stress of dealing with debt will also take its toll.
Enacting a well-structured spending plan will help you manage and reduce these financial burdens. In turn, it will also significantly alleviate the stress and financial pressures associated with debt. While this will greatly improve your mental health, it will also provide greater peace of mind and a sense of control over your financial situation.
12. It will change your relationship with money.
Overcoming the emotional barriers associated with “budgeting” is a crucial component of your success. By choosing a neutral term like “spending plan”, you are removing obstacles that will make it easier for you to reach your financial goals. Over time, these small changes in the terminology you use will effectively change your entire relationship with your finances.
By reframing your approach to managing your finances, you are more likely to feel empowered rather than restricted. In addition to building your confidence and momentum, it will also increase your chances of financial success.
Adding My Two Cents
A spending plan is a versatile and essential tool in managing debt. While many focus on the ways it helps you prioritize your spending, it is also one of the most effective tools to help you deal with your debt. It not only helps in organizing and planning your finances but also fosters discipline, awareness, and control over your financial situation. By utilizing your spending plan effectively, you can address your debt, make progress toward financial freedom, and cultivate healthier financial habits for the long term.
In essence, a spending plan acts as a financial blueprint, allowing you to allocate resources according to priorities. When you make debt repayment a top priority, it will completely change your you view your financial situation. This intentional approach to money management is the key to achieving financial stability and gradually eliminating the burdens of debt.
Read More
- 8 Effective Strategies to Build Your Spending Plan
- Unleashing Financial Freedom: A Guide to Creating Your Personal Spending Plan
- Coping With the Lifestyle Adjustments of a New Spending Plan
Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.
Another tip is do reduce credit card debt if you have any by focusing on the highest interest card. Knocking out the highest interest card will leave you with more money to devote to other debt you might have. This helps your credit score by decreasing your utilization. I did this and it worked.
This is a very good point. I did the same thing and was able to get out of five-figure debt in less than a year. Thanks for sharing!