I recently spoke with an individual who was excited to begin his budget. He downloaded the spreadsheet available on my site and asked me to look over it. Everything looked good except for one thing I noted. This individual had a category as follows:
Credit Card Payment (minimum)
This shocked me for a number of reasons. First and foremost, the minimum part that was included. Secondly, paying off your credit cards is not an expense. For example, if you go to the grocery store and spend $50.00 on groceries but apply the charge to your credit card, then your budget should reflect a $50.00 purchase on groceries. The credit card is simply a means to pay for it. Finally, I recognized that this individual had credit card debt, and he assumed paying off in minimum installments would eliminate it. Yes, theoretically, as long as no further debt was incurred, but it would take a while.
This ultimately led me to the following conclusion. This individual had a significant amount of money remaining in their budget every month. I advised him that if I was in his situation I would do the following:
- Make sure I am able to cover all of my necessary expenses in the budget. This would include rent, gas, food, student loans, etc.
- See where some expenses can be cut. Bringing his lunch to work versus going out to eat might be the smartest financial decision until he gets his credit card debt under control.
- Use any extra money at the end of the month to pay off the remaining balance on the credit card. Credit cards are notorious for having extremely high interest rates. The quicker you tackle this type of debt, the more you save.
- Set a goal for paying off the credit card debt. We agreed by the end of the calendar year. Once the debt is paid off we could redo the budget and include categories for savings, retirement, and other financial goals.
Credit card debt can be a nasty thing, but a budgeting approach to handling it can make your financial life much better. Use a budget to pay off your debt if you have any, then you will be able to create additional space to begin planning for your financial future more aggressively.
Budget Smart, Invest Wise