One of the cornerstones to successfully making progress towards debt reduction is forming a budget. But the idea of having a finely-tuned budget with a laundry list of items on it can scare some off. It is much more important to make and execute a rough budget first rather than to shy away from it and succumb to inaction. Once you’ve made the decision to reduce and eliminate debt, don’t kill your efforts. Make a simple budget that captures the major expenses each month and follow through with it. Here’s what to do.

The Big Three: Housing, Food, and Transportation

Make quick rough estimates of how much you need for one month in each of the three areas. Housing: estimate this as your rent, mortgage payment, maintenance costs, and utilities. Food: estimate this as a reasonable grocery bill for one week worth of food and multiply this by 4.5 to come up with a month-long budget amount. Transportation: estimate this as your monthly car payment, gas for commuting to and from work at 5 days per week plus one extra day for any non-work-related trips (times 4.5 for the month), plus basic car maintenance like an oil change. These three areas comprise a rough list of mandatory expenses.

Discretionary Expenses

These, unlike mandatory expenses, are easy to trim from a budget, because they are not fundamental to surviving or getting to and from work. Cut out all discretionary costs from your budget immediately, then add back in a small amount to use sparingly for your social life over the course of one month. It turns out to be a blessing in disguise to cut out certain items like cable TV, gym memberships, trips to fancy restaurants, and subscriptions of all types. The best things to cut represent expenses that recur from month to month.

Income vs. Budget

Now, examine your income. What is your monthly cash flow? This is basically the after-tax amount of one month worth of paychecks received. Do you make enough money to cover The Big Three? If you don’t, then you need to switch to a cheaper place to live. Consider looking on craigslist for rooms to rent for cheap. Or maybe you can telecommute to save on gas costs.

Do you make enough to cover The Big Three and your discretionary budget? If you do not, then the easiest decision is to either cut out your discretionary expenses each month until you’ve eliminated your debt, or to switch to cheaper housing. If you do cover The Big Three plus the discretionary, then subtract that total amount from your monthly income amount. Dedicate the remainder towards debt payments. Do not try and build up a savings, invest in retirement accounts, or engage in any other activity. Everything remaining should be applied directly towards debt reduction. For a bonus, cut out the discretionary expenses and add that amount to your monthly debt elimination payments. This way you will emerge from debt even faster than anticipated.

Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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