Expert Q&A: Budget for debt, but not too tightly
A grad's debt payoff plan will fail uness it includes fun, says The Credit Guy
By Todd Ossenfort
Ask The Credit Guy
Dear Credit Guy,
I have graduated college and found a full-time job, but I have loads of credit card debt to pay off. What is a wise payment plan I can go on to pay off the debt, but also pay my living expenses and possibly set some aside for savings?
-- Diploma Debtor
Congratulation on your accomplishment! Finding your dream job, joining the ranks of the working stiffs in the real world and becoming an upstanding tax paying citizen is what you have been working for over the last 5 years.
Your situation is quite common among people your age entering the workforce full-time. I have seen this scenario many times before.
The best advice I can offer is to sit down and do a budget. I know, you thought you left homework behind when you graduated, but this is a very helpful tool if you’ll take the time to do it. The more in-depth and detailed the budget the more useful it will be.
Start with your income. You have to know what your net take-home pay is before you can decide how much of a payment plan you can afford.
Next, write down your fixed expenses -- rent, utilities, food, car payment, etc. Many personal finance budgeting tools are available online to help establish a budget that will allow you to save for the future, pay off debt and still have some fun and live as well.
Ballpark budget benchmarks
Here are some common benchmark figures to keep in mind when setting and reviewing your budget.:
- Your housing costs shouldn’t exceed more than 30 percent of net income.
- Transportation costs should be approximately 15 percent.
- Food should be about 16 percent of your total budget.
- You should try and keep utilities around 5 percent.
- Another 5 percent should go toward unsecured debt, such as credit cards.
- Personal and miscellaneous items should amount to the remaining 29 percent.
If your budget is significantly higher in any one of these areas, it should indicate an area that you will need to adjust.
Budget for fun, too
Any repayment plan or budget has to be realistic and obtainable. One thing that any good budget cannot be without is an entertainment line item. To think that you aren’t going to go out for a night out on the town once or twice a month is unrealistic and sets you up for failure. Include an amount for entertainment, but keep it to a dull roar.Although all work and no play can make Johnny a dull boy, too much play can make Johnny too far in debt!
Only you can decide how aggressively you want to pay down your debt. Once you have a budget in place, you’ll know just how much you have in your miscellaneous section and how much of it you want to use for debt repayment. To help decide, check out a payment calculator that will let you know how long it will take to pay down your balances by paying a specific amount each month, such as the CreditCards.com calculator, "What will it take to pay off my current balance?"
It should go without saying, but I’m going to say it any way. To pay down your debt you will need to refrain from adding additional charges to your balances. I hope this will get you headed on a path for success and once again welcome to the school of life and your first class is real world finances 101.
Take care of your credit!
Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.
The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to The Credit Guy.
Published: December 28, 2007
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