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Budget And Debt Management Tips To Reduce Your Debts

Posted by David Falvey on Friday, August 21st, 2015

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I get asked for budgeting and debt management tips quite frequently so we put together a list of common ideas to help get you going. Many of the reasons people have to file for bankruptcy are outside their control; a loss of a job, an automobile accident or disabling accident, or a divorce can cause your income to suddenly fall while the debts start mounting.

As an example, in the recent past, the economic recession caused home equity to drop and left some homes worth much less than they were originally purchased for.

When debts get to be too high, a Chapter 7 liquidation bankruptcy or a Chapter 13 plan may be required. The best remedy is to try to avoid bankruptcy if possible. Whether the person in debt is trying to avoid bankruptcy, in the process of bankruptcy, or trying to manage after being discharged, sound budgeting tips will help.

Here are a few guidelines consumers should keep in mind.

Everyone should have a budget. A budget itemizes all your assets and the amount you owe on each asset. It also lists all your debts that are not secured by any assets. A budget summarizes all of your disposable income.

Disposable income is the amount you have left after you pay for taxes, social security deductions, Medicare expenses, worker’s compensation and unemployment insurance. Other income deductions include any fees or expenses necessary to keep a job such as union dues.

The budget should also itemize the expenses for the debtor and for all members of the household. A consumer bankruptcy attorney can provide forms to make sure the debtor is considering each and every expense that may arise.

Standard Budget Expenses

Home Expenses: As a rule of thumb, the home expenses should about a third of the disposable income. The home expenses include the mortgage or the rent, any subsequent mortgagees, condo fees, association dues, property taxes and homeowner’s or renter’s insurance. Home expenses also include maintenance and repairs casts. Utilities include water, electric and gas monthly charges. Most homes often have a water charge, a garbage cost and a sewer fee.

Transportation Expenses: Anyone who owns a car, truck, motorcycle or other vehicle usually has to finance the vehicle. The debtor owes a monthly amount until the loan is paid. Auto insurance for the owner and for liability in case another person is hurt by the debtor is legally required in most states.

There are maintenance costs for repairs, oil, and new tires. There are costs for yearly inspections and for getting and keeping a driver’s license. People who do not have their own vehicle have to pay the cost of public transportation – trains, buses, trolleys, ride-sharing, etc. The rule of thumb for many people in debt is that transportation costs should be about 15% of disposable income.

Installment loans: In addition to home and car loans, student loans are a major cost for younger people. Some college educations can cost over $100,000. Installment debts over 15% are a concern.

Living Expenses: Food is an obvious expense. Other common living expenses include non-food grocery items like toilet paper and razors, cell phone charges, TV fees and Internet costs. There are also costs for clothing. A big expense debtors need to figure is medical insurance and the cost of medications. There’s also dental costs and the money for eyeglass exams, lenses and frames. Attending a church of any faith normally means paying some sort of regular fee.

Parental Costs: Here’s one area where the charges can really add up. People need to budget for daycare and babysitter costs, and all the daily costs of supporting a child.

Luxury Costs: Additional costs include money for charities and costs for work, newspapers and books, vacations, gifts, movies and sports.

Really wise people will also budget at least 10% of their money for savings including money for retirement, for college if there are children and for unexpected expenses.

Additional Ways to View a Budget

When considering a budget a second way to value the expenses is through these means:

  • Determine which expenses are absolute musts. In the real world, everyone needs a place to sleep. Certain utilities like water are essential. Everyone has to eat. Other utilities like garbage removal prevent disease. But even within the essential category, there are limits. You can easily spend $1000 a month for food, but for many individuals a few hundred dollars a month allows for nutrition and a healthy life. An efficiency bedroom can be managed for single people by getting a sofa-bed instead of paying for a one bedroom.
  • A second level of expenses are expenses like transportation that is needed to travel to prove income. But as, with the essentials, there are ways to survive on less. A used car can work if you just do local travel instead of the cost of buying a new one.
  • If your budget is really tight, then many of the daily expenses like TV, books and the Internet can be replaced by using a library card
  • For each person, the numbers will differ depending on the number of family members and where the debtor lives.

In some cases it may be wise to sell some assets if the debt burdens are too high. In other cases, a bankruptcy may still be the only remedy. For example, if you own a home but the combination of mortgage and other home expenses is too high, then it may be wise to consider selling the home to avoid filing for bankruptcy.

Alternatively, you may consider filing a Chapter 13 bankruptcy which allows a debtor the ability to save the home and pay the arrears over time. The same idea applies to owning or selling an automobile and professional work tools.

This is not supposing that you live below your means or below what’s comfortable permanently, but only for a time until your debts are cleared and you’re breathing above water again.