Why 20 Percent Is the Only Ideal Budget Allocation Method for Debt Payments

Isn’t it great to have spare credit card limit every month and get the satiation that you could indulge in a small shopping spree or get extra cash when you really need? It feels good to have this kind of financial freedom. However, it cannot be developed without financial discipline. You will have to follow a simple rule for debt- never take more than 20% of your limit.

A harsh sounding rule that actually works

If you don’t want to find yourself stuck in a vicious debt cycle, you need to ensure that debt repayment doesn’t make up for more than 20% of your income. In fact, it should be limited to 10% if possible. There are several reasons why you will live a happier and more fulfilled life after following this rule. Here is how it works.

Let’s assume that you earn 1000 pounds per month. Your total debt payment is $400, which is 40% of your income. After paying such a hefty sum for furnishing debt, you will not have much to spend on your daily needs. In fact, the savings will be zero and you may frequently need some additional funds- even for small things like buying new clothes.

Thankfully, there are reliable businesses like https://www.paydaypixie.co.uk/ that can provide you quick loans whenever needed. You just need to be 18 years of age and must have at least a part time employment to be eligible for these loans. Even though they are lucrative options, you must avoid taking a fresh loan. They will fulfill your current needs but increase your debt liability the next month. So be careful.

Now let’s take a second example. You earn 1000 pounds a month and all your necessary expenses demand 500 pounds per month. Discretionary expenses take up another 20 percent or 200 pounds. You are now left with only 300 pounds. Of this, you are allowed to furnish no more than 200 pounds to debt each month. Take a fresh loan only when your old loans have been paid.

What about credit cards?

Never use more than 20 percent of your available credit card limit. Closing a credit card account will likely affect your credit score negatively. Therefore, it is better to limit your expenses and never take the debt over 20 percent. Even in the most desperate times, you should never use more than 30 percent of your available limit.

Limiting debt repayments doesn’t mean increasing your discretionary expenses. Instead, you should increase your savings. Use your spare money to fund your savings account and emergency fund instead. This will help you in building wealth over time and have a big, fat bank balance as well. You will be surprised at the amount of money you could save by simply avoiding a weekend getaway or making your own coffee or lunch.

Are you ready to give your life a new direction? If yes, then go ahead and follow the 20 percent rule. The results will be surprising and very pleasant.

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