This post is a follow up to my previous post about my 4 big areas to focus on when it comes to achieving freedom.  I feel that being debt free is the biggest thing you can do to give yourself the most freedom possible.  Owing other people money can be one of the biggest sources of stress and unhappiness in life and can have a big impact on everything that you do.

Our journey to pay off debt started many years ago and was extremely bumpy and had many false starts – we would get started and make a little headway but an “emergency” would always come up that would cause us to tap into the emergency fund and we would lose focus and usually end up falling completely falling off of our plan.  Most of these “emergencies” were not really emergencies and could have been planned for if we had been more aware and more focused.  Remember, Christmas and birthdays happen at the same time every single year!!

Once we finally became serious about paying off debt the biggest and most important thing that we did was to start living off of a budget.

The first time you sit down to do a budget it can be very intimidating and it can be easy to stop before you even start.  First and foremost, you and your spouse both have to be on board with budgeting.  If you can’t agree that you even need a budget, then you will never agree on what the budget should look like.  Even if you are single, it is vital that you understand the need to be on a budget.  Even if you feel that you are good with money go do some research – read some of the testimonials at www.daveramsey.com about how important a budget is and how it has changed the lives of people who are doing his total money makeover.  You have to convince yourself that it is important before you start, or you will never take it seriously!!!!

Next, do the budget before the paycheck is cashed or deposited.  If you wait until the next day or the next week, it is so easy to go to wal-mart or somewhere and spend some money that didn’t get included in the plan.  All of your money needs to be part of the budget!

When you do finally set down to write out the budget (together if you are married) make sure you plan for every possible thing that you will be spending money on during the pay period.  Even if its $4 for a Starbucks coffee or a few dollars for a mid-afternoon snack at work.  You’ll be surprised at how much money is left over at the end.  This is also a good exercise to look for ways that you can make lifestyle changes later on.

Once all upcoming expenses are accounted for, make a plan for the leftover money.  If you already have a small emergency fund in place (Dave Ramsey recommends a baby emergency fund of $1000) the extra money should go towards the debt with the smallest dollar amount (not the highest interest rate loan).  By paying towards the smallest dollar amount first it will let you gain a little momentum when you see the small debts start falling off the list.  Even if you are a math nerd and it hurts you to not pay extra on a high interest rate credit card just trust me, you might sacrifice a few dollars in interest payments early on, but the exhilaration of paying off a debt truly makes up for it.  If you were so great at math you wouldn’t be in debt in the first place!

Next, assign a role to EVERY SINGLE DOLLAR!!! Your budget should have a balance of 0!! If you accurately account for every expense on the budget it will honestly feel like you’ve gotten a raise, most of us don’t realize how much we spend on miscellaneous impulse purchases throughout the month.  If you are doing a debt snowball plan, then this leftover money should “mostly” go towards the first debt on the list (my next tip will cover some of the exceptions to this rule).  Do not wait to pay this extra towards the debt, do it as soon as you get paid, this eliminates to chance that you might spend it on some frivolous purchase that does not help you reach your financial goals.

Finally, don’t forget to include a category for spending money or entertainment.  Just because you are working hard to pay off debt doesn’t mean you can’t have a little fun.  This can be a little tricky sometimes, if you are really focused and serious you might feel a little guilty about having some “fun” or “play around” money.  I’ve found that if you don’t allocate a little bit towards fun money you will get disgruntled eventually and slowly lose your focus and possibly fall off the wagon completely.

Of course you have to balance this out, don’t set aside an unreasonable amount for movies or comic books when you have a mountain of debt to pay off.  Continue to be frugal, your personal amount might be $50 a month, while someone with less debt or a higher income might set aside $100 a month.  Only you (and your spouse, if applicable) can determine what will work.

These tips are just a primer to get you started.  A budget is very personal, once you get started you will continue to tweak it to your unique situation and find what works for you.  There is no one size fits all when it comes to budgeting.  To this day we use a simple notebook and have one page for each pay period.  Everything is hand written and easily editable.  Even though we’ve been doing this for a few years we still have to make changes and corrections.  The most important step in budgeting is to just do something – just start and don’t get discouraged.  Your first few months WILL be painful and will not work right.  Just stick with it.

Feel free to add any tips or recommendations that you might have!!!