Simple Budgeting for Youth in Debt

I've previously talked about things like how much you can borrow and what youth should do when they've borrowed too much. One of the step I mentioned before was to reduce your spending. To do that effectively, you need to plan your spending and follow through on your plan. This is called budgeting. There are several different budgeting methods described on the Internet but I will cover the one I have used to help some friends out of debt.

Step 1 - Calculate how much you make.
This is fairly simple. Find out your take home on each pay cheque (i.e. excluding the tax, CPP, or EI deductions). Multiply it by the number of times you get paid in a year. Don't forget to add your other sources of income, e.g. rental income. Also don't forget those odd income sources such as bonuses.

Step 2 - Calculate how much you spend annually.
Think about what you spend on. I normally organize my thoughts based on payment frequency. What are the things I pay annually? e.g. Car insurance. What are the things that I pay semi-annually? e.g. Property taxes. What are the things I pay bimonthly? e.g. Hydro. So and and so forth down to what I pay for weekly? e.g. Lunch, Coffee. Don't forget to add a miscellaneous expenses item.

Step 3 - Add your debt servicing into your annual spending.
If you have consolidated your debts already, you will know what amount you need to pay to service your debt on a monthly basis. Add this amount to your annual spending. If you haven't consolidated, go do that.

Step 4 - Balancing your budget.
Now you know how much you make in a year and how much you spend. Subtract your income from your expense. What's the difference? If the difference is positive, then the budget is done. If it's negative, then you have some work to do, so read on.

Divide your expenses into 2 categories: Must Have (Necessities) and Nice to Have (Luxuries). Your debt servicing is a Must Have, by the way. Then start taking away luxuries that you are willing to give up in order to service your debt. This is where your life style starts taking a hit. Keep chewing away at the luxuries until the difference between your income and expenses is positive. Then, you're done with the budget.

If you've given up all the luxuries and still come up in the red, you'll need to move on to step 5. Otherwise, skip to Step 6.

Step 5 - Calculate Your Assets
Take into stock all the major assets you have - everything that you can sell for some significant value that can be used to service your debt (real estate, vehicle, piano, etc.) . Sum this all up. Then try to rebalance your budget by selling off these major assets. Sell off more assets until the difference between your income + sold assets and expenses is positive.

Step 6 - Executing Your Budget
Once the difference is positive, you have budget - a plan on how to spend for the next year. Stick to your plan. Make sure you only spend on the things that are still in your expense budget. Make sure you sell the assets you said you were going to sell for at least the price you put in your budget. Make sure that you make at least as much as your income budget. Repeat this budgeting process every year until your debt is under control. Even if you've paid off your debt, you can easily convert that debt servicing amount into savings or investments. Those are topics for another day.

Now, if you've taken away all your luxuries and sold all your assets but the difference is still negative, you need to seek pardon for some or all of your debts. This is outside the scope of this blog but there are several debt/bankruptcy services available and you may even find some on the ads in the margin. You'll need to seek help from such professionals.