How should a person prioritize spending and saving from his take-home pay when he still have tons of loans to pay?
With more people than ever carrying large amounts of loan debt, the question of how to manage it – so that you can get on with the rest of your financial life – is increasingly important.
Large debt is a drag on a person’s future, so the issue becomes: Do you make a priority of paying it off, or do you spread your limited funds across several financial goals, and try to blend the debt payment into the big picture?
There’s no one-size-fits-all answer to this dilemma, but there are a series of strategies you can implement that will enable you to move forward. Exactly how — and when — you put those strategies into practice will depend upon where you are in your life now, where you hope to go, and how quickly you want to get there.
Create a workable budget
The first thing you have to do is to be fully aware of your income and expenses. And that means creating a budget.
The whole purpose of a budget is to have a roadmap that will determine exactly how you allocate your money.
Once you do that, you’ll have a better handle on your options, whether it’s paying off your loan debt, or saving and investing money.
You can take advantage of online budgeting applications, both free and premium, to help you develop and maintain a budget. But the basic idea is always to track your income and expenses, typically on a monthly basis, and then to make modifications where necessary.
Start with your net income, after taxes and other payroll deductions. Then, list your expenses. It helps to separate them out between three general categories:
- Fixed expenses – like rent, debt payments, and insurance
- Variable expenses— like groceries, utilities and gasoline
- Optional expenses— these are expenses that are desirable, but not necessary; they can include money for vacations, going out to dinner, and gym membership
The purpose of segregating your expenses is to determine how much flexibility you have in your spending.
As a rule, your fixed expenses are necessary survival costs. There’s not much you can do about them, unless you are prepared to downgrade your basic standard of living.
Variable expenses are necessary costs, but they’re flexible since you can adjust how much you spend on them. For example, you can find different ways to cut your grocery bill, or even to reduce certain utilities, especially electricity or heat.
Think of optional expenses as the “fat” in your budget. That is, if you need extra money for other purposes, it will most likely come out of this category.
Once you have determined your available income and expenses, you’ll know how much money you have left over each month. If there’s nothing left over, you’ll either have to cut expenses, or increase your income.
The whole purpose of this exercise is to either identify or create breathing room in your budget. That’s the money you will use for savings, or to pay down debt. Any other strategy you might use won’t be effective unless you are able to create a workable budget.
(to be continued…)