How to Budget Properly to Avoid Debt Later
Personal finance experts often emphasize the importance of budgeting.
It's known to help people get out of debt and stay debt free.
Regardless of the numerous articles and advice columns written on the subject, many people still seem unable to budget.
Some follow advice incorrectly and manage finances improperly, while others don't even bother with the first step. People don't realize that budgeting properly only requires a few simple steps.
Read ahead to find out what these are:
Write Down All your Expenses
The first step to budgeting properly is to sit down and write everything you spend your money on. These could be regular grocery runs, the mortgage bill or tickets to a movie. Everything should be noted without overlooking. Before you manage your budget, you need to observe your own spending habits. Make a chart of monthly income and expenditures. Note down all income, including the ones from secondary jobs or backyard sales.
Then, in a different column, write down what you spend your money on. It's important to make categories such as utility bills, mortgage, groceries, transport, medicine and entertainment. Include categories as you see fit. Spend a month simply filling out this chart. Do it on Excel or a similar software so the data is easy to view and manipulate later.
Figure Out Your Spending Patterns
Now that you have your income and expenditures chart at hand, you can easily see where your money is going. Add up the expenditure categories and see which costs you the most. Do you spend a majority of your income paying the mortgage and utilities, or do you spend a good amount of it on entertainment? Are there any categories, like medicine, for which you should be spending more? And once you subtract total expenditures from income, how much, if any, do you have left? Don't be discouraged if the result doesn't look pretty. Also, don't be overconfident if it's good. In either case, you should scrutinize your spending patterns and see which areas need improvement.
Determine the Important Expenses
Take your eyes off the chart for a minute, and make a list of expenses that you think are the most important. You should include expenses like high-interest incurring personal loans, mortgage, and utility bills for example. If you are repaying multiple loans at once, sort them according to their interest rates.
Now go back to the chart. Are you spending the majority of your income on these crucial expenses? If not, where is your money going? You should be able to see the places where you can make cuts to funnel more money into paying off debts. If your entertainment budget takes more than ten percent of your income, you should cut it down and use that money towards paying off a high interest loan. If you are deeply in debt, cut down all entertainment expenses for now so you can fast track paying off loans.
Set Financial Goals
Once you have a good idea about your income and spending patterns, you should learn to set financial goals for the future. You can make a resolution to pay off a personal debt in a year, or you can aim to save more money for retirement. Write these down, so you can refer back to them when you are budgeting. Make up your mind regarding these financial goals and do not lose sight of them in the future.
Create a Budget Plan
Consider your financial goals and spending patterns. Now you can finally create a monthly budget plan. See where you can afford cutbacks and funnel more money into paying off debt. Differentiate between necessary and gratuitous expenses and allocate money accordingly. Also, don't forget to set aside some money for savings. Your economic future will be extremely dire if you do not have an emergency savings fund or a retirement plan. Finally, be determined to strictly follow this budget plan.
Be aware that your monthly budget plan could change if you experience changes to your income or expenses. If you suddenly find yourself needing cash to repair the roof, you might want to make a new budget. Having an emergency savings account will greatly help in a situation like this. Also, after you create a budget plan, don't stop monitoring your expenses. Keep noting down what you earn and spend in the chart. Read more about creating a budget on bankrate.com
Making a monthly budget is not that hard. All you need is some effort and determination to get started. Do take your budget plan seriously. It will only work if you stick to it. Budgeting may feel difficult at first, but it will become natural after you keep doing it for a couple of months.