As the global economy worsens, many households have found themselves living paycheck to paycheck. Proper budgeting is a necessity in these hard times, as a single financial emergency can cause huge consequences for those barely making ends meet.
The good news is that almost anyone can develop a solid financial picture simply by taking control of their finances and educating themselves about their financial picture. What follows are techniques to help you on the path to a healthy budget.
- Examine your finances carefully. The first step towards a healthy financial picture is to educate yourself about your current financial situation. You will need to examine your loan, credit card, and bank statements to ascertain your monthly income, your monthly expenses and your debt owed.
- Make a plan to pay down your existing debt. Saving money is great, but if you are saving money at 1% interest while paying down credit cards at 20% interest you’re not doing yourself any favors. Many people, when confronted with debt, have a tendency to try to ignore it or put it off for another day.To appropriately pay down your debt, you will need to know your debt balances, the terms of your repayment, your minimum payments and the percentage rates attached. You will want to pay at least the minimum balances on all of your accounts, and then devote the remaining funds to the debt with the highest percentage of interest.
Of course, to know how much you are paying towards your debt, you will first have to draw up a budget.
- Compare your income and your expenses. Since you will already know your debt amounts, the first step towards drawing up your budget will be to itemize your monthly expenses and your income. It is important to be as accurate as possible in this step. You may estimate in your head that you spend $60 eating out every month, but when you add up all the charges the true amount might come out closer to $200.Your expenses should be separated into two categories: necessities, and discretionary income. Necessities are items that are required to live: your rent or mortgage payment, your auto payment, and your minimum debt payments will go here. Discretionary income are items such as groceries and clothing, which are variable amounts that can be adjusted.
- Make adjustments to your discretionary expenses. Once you have listed your income and expenses, you will want to total up both items. If your income exceeds your expenses, then you have a solid budget. The excess income should be allocated to debt if you have it, and if not, into savings.If, instead, your expenses exceed your income, adjustments will have to be made. You will want to start by examining your discretionary income, and eliminating any luxury items that you can until your income will cover all of your expenses.
- What if you can’t cut your expenses any further? Unfortunately, you may have already cut your expenses as much as possible and still be in the red. In this situation, it may be time to seek alternative services such as debt management, debt settlement or financial counseling. You may also need to seek ways of increasing your income rather than decreasing your expenses, either via pursuing a different career path, or accepting a second job.
The most important element of budgeting is to educate yourself about your finances and to remain on top of them. You should revisit your budget regularly to verify that you are still following your plan. If you find yourself straying too much in one category, consider making adjustments in a different one. Being vigilant about your finances enables you to stop worrying about when and how the bills will get paid, and instead focus on living your life.
Thomas Hathaway is a finance consultant and understands there are times when payday loans may come in handy when you have financial urgency before your regular pay date.
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