Spending Plan The First Step In Debt Relief

The number of consumers looking for debt relief exploded in 2008. Search statistics from Google and other poplar search engines show a significant increase in the number of searches related to debt, foreclosure, credit card debts and loan modification. While the state of their personal finances is in the forefront of consumers’ minds, consumers can take positive steps toward managing their finances.

Whether you work with a firm that specializes in debt relief, or employ your own plan, one of the first steps you should consider is the creation of a spending plan. Spending plans can be simple or complex, but a spending plan can help you reduce your debts, spot areas in which you can reduce your spending or increase your savings, and identify short-, mid-, and long-term spending priorities. Three particular expenses will find a place in most spending plans.

In general, your housing shouldn’t consume more than one-third of your available monthly cash. Once you exceed this amount, you’re committing cash that should actually be set aside for emergencies, and impairing your ability to deal with the unexpected. If you spend more than one-third of your income on housing, consider refinancing if you’re a homeowner, or reduce your expenses in other areas to recapture the extra cash you’re laying out on housing.

Transportation may be another area where you’re spending too much of your monthly income. Car payments can often reach into the $400-$500 range. Add to that the cost of gasoline, insurance and maintenance, and you’ve got a significant expense. If you have a spouse who also has a vehicle, your transportation costs may even exceed your expenditure on housing. Here’s one area in which you can save. You can reduce your spending by eliminating one vehicle when possible. Take the cost of commuting into consideration when you decide where to live. Trade in a less fuel-efficient vehicle for a more efficient one and take advantage of tax breaks on hybrid vehicles. Regular maintenance can help you avoid expensive repairs. Speaking of which, don’t forget to take the cost of maintenance into consideration when choosing a car.

Your spending plan should commit between 10 and 20 percent of your income to debt repayment. Debt can come in many forms, but your priority should be to accelerate the payments on debts that have the highest interest rates first. Mortgage interest and student loan debt come with tax breaks that you shouldn’t ignore. Credit card debt doesn’t come with such breaks so it’s to your benefit to get rid of it as soon as possible. The type of debt you’re carrying should determine how much of your income you devote to debt repayment.

Overall, a spending plan will help you understand discrepancies between your stated spending priorities and your actual spending. Once you’re aware of the areas in which you’re likely to divert from the spending plan, you can take steps to avoid making significant spending errors.