When dealing with multiple loans, most people look into debt consolidation to streamline their repayment and get out of the cycle of debt as early as possible. This is the case with a low-interest debt consolidation loan, where you can get a lower annual percentage rate than you previously had.
However, this is not guaranteed and depends on your credit score. In the best-case scenario, you will have all the above advantages and be debt-free by the end of your tenure. However, let me say that while it sounds great in theory, the reality can look very different unless you budget your finances accordingly. This is arguably the most important skill necessary to get rid of debts as early as possible and keep your financial health sound.
In this article, I will guide you through how to budget your finances once you get on a debt consolidation strategy.
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Calculate your total debt
Start by laying out the necessary details of the debts that you owe. This includes the total amount, the interest rate, the minimum you must pay monthly, and the dates you must pay. This is the most basic step in your budgeting that can go a long way in preventing penalties and defaults.
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Use budgeting tools
While a pen and paper might seem convenient, they are simply not enough to pay off debts. You need more accuracy and categorization skills to chalk out your payment. Banking apps generally have calculator tools that help you categorize your payments and different dates and dues. This is crucial to get a bird’s eye view of the total debt you must repay in the given tenure and keep your head above water.
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Set a budget for your income
Your payment goes out of your monthly income. Hence, it is necessary to budget your income accordingly. Deduct the cost of essentials, necessities, and taxes from the amount you earn.
What should remind you of your disposable income? From here on, you should establish your spending priorities and cut back on being thrifty until you are near your debt elimination. For instance, if you’ve been using the latest iPhone or MacBook when you have devices that are still functional and serve the purpose, I would advise that you hold off for at least the time that you need to repay your debt.
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Follow the 50/30/20
This is a rule that comes in handy when you are new to budgeting. By the rule, you spend 50% of your income on needs and essentials such as food, utilities, insurance, etc. The next 30% goes into your wants, such as entertainment, dining out, indulgences, hobbies, etc. The remaining 20% goes into your personal savings and emergency funds.
4. Revise your budget
Once you have a budgeting strategy that works for you, you must revise and check it regularly. This will ensure that none of your finances are going unchecked and that you never miss out on any EMI payment.
Wrapping up
Budgeting is the backbone of repaying your debts and getting out of the cycle. The aim is always to make yourself more self-sufficient to eliminate the need to draw on further debts. Hopefully, with this article, you will be more empowered to manage your finances in a way that helps you keep your financial health in the green in the long term.
A low-interest debt consolidation loan will help you to a great extent. Hopefully, this guide will help you choose the loan judiciously! Signing off and wishing you well with your budgeting journey!