Are economic downfalls affecting you and creating financial hardships for you? Are you too worried about losing your job or how to deal with your existing debts? Don’t get paranoid! You may easily avoid a potential personal financial crisis, get out of debt, and stop incurring new debts if you get back to basics with a proper budget.
However, creating a budget is a simple thing that you can do right now to improve your financial situation. Budgeting may include mapping out your current finances and prioritizing your spending requirements. Above all, the key to a successful budget is consistency.
Since budgeting is a long-term process, the more consistently you log your expenses, assess your progress toward your financial goals, and look for ways to reduce wasteful spending, the more benefit your budget will have on your financial life.
Let’s take a closer look at the budgeting strategy and how it can help you to manage your finances, along with keeping your debts away!
What is budgeting?
Budgeting is the method of creating a financial plan to spend your money wisely in multiple categories. The spending plan is named a budget. This plan will help you to allocate money from your paycheck into several essential spending groups like household, transport, debt payments, insurance, mortgage, etc.
Budgeting helps you to balance your monthly expenses with your hard-earned limited income. This balance is needed as if you overspend in any category or group, the other groups may face a deficit. Many people often forget that they spend more than they earn and slowly sink deeper into debt every year.
So, you’ve understood that you need a budget to run your financial life smoothly. If you don’t have enough money to buy a certain thing, budgeting can help you to make provisions and help you focus your money on the thing that is most important to you.
Why is budgeting so important for you?
Budgeting is one of the most important financial habits that you should follow. Creating a budget is wise whenever you face financial hardship and control your money problems. But if you’ve never lived on a budget, or haven’t experienced all the benefits that budgeting has to offer. So, you might have no idea about the importance of budgeting in your life.
You need a budget and a proper spending plan to pay off existing debts, save money, and avoid debt. Apart from that budgeting is also important because it helps you control your expenses, track your expenses, and help to create an emergency fund to meet sudden financial needs. Additionally, through a revised budgeting, you may make better financial decisions for your life and focus on your long-term financial goals.
These are the benefits of budgeting that makes it so important for your finances:
a. Budgeting helps you to remain organized – It will be easier to live your life if you follow a budget and keep your financial life organized. Budgeting helps you to maintain all the accounts, debt payments (credit card debt, payday loans, etc.), and other calculations in order, which keeps every expense category well funded and balanced with the monthly income.
b. Budgeting helps you to be on track towards financial goals – It is important because it helps you to be on track when you are trying to fulfill financial goals. To complete your life goals you’ll need a good plan, and need to focus on the method you are following. That’s why having a budget is so important.
c. Budgeting allows you to control spending – Budgeting helps you to keep a close eye on your daily spending habits. This way you may locate every big/small expense and its effect on your budget. That information can help you take control of your spending.
d. Budgeting keeps you away from debt – It can help you get out of debt, or help you to create a plan that may help you save a good amount of money every month. You can use that money to pay off unpaid debts and purchase without using credit cards. This way you may avoid debt and keep the total debt amount under control.
e. Budgeting helps you to save for emergencies – Creating a budget may help you to be prepared for any unexpected financial event. You never know when an urgent renovation or repair work will arise in your home, or your car needs a major overhaul. So, through budgeting, you may generate a good emergency fund and create provisions for sudden expenses.
f. Budgeting makes you financially free – Budgeting helps you create a solid plan for every possible financial move in a month. You can assume and allocate money for your every need, and cut off unnecessary items from the requirement list. This way you may stay ahead of your financial goal.
Apart from that, once you start living on a budget, it will help you to finally build your desired financial life that you always wanted. Through budgeting, you may ease up your paycheck-to-paycheck lifestyle, become debt free, and have plenty of financial back up ready.
Different budgeting strategies to manage money
1. Budget what you have earned
You might be going to receive money from different sources apart from your paychecks, such as alimony or child support. But those are uncertain funds, so you should depend upon the monthly paycheck that you have received, and create a budget on that money to cover expenses. It would be a practical approach to budget on the money that you have in your wallet.
2. Savings should be a fixed priority
Savings should be treated as an expense and should be included within the budget. That means you should decide how much you can afford to save and make provision for that money in your monthly budget. Practically you’ll be paying that amount to your savings account each month.
This is how you can build a money-saving habit into a consistent habit. If you like you may ask your HR department to split your Direct Deposit between two accounts, one into your checking account, and the other one into your savings account.
3. Track your spending without fail
This is most important as most of the time people lose track of their spending and build a huge debt burden. Overspending may create havoc in your financial life so, if you are budgeting, make sure to track every penny you are paying. Save your receipts and note your purchases immediately; it will help to analyze day-to-day expenses and you can confidently pay off debts.
4. Limit credit card purchases
Credit cards are mostly responsible for overspending. If you run out of cash, you may have to use a credit card. But if you have enough cash with you to make the payment, do it. Do not use credit cards if you can’t afford to pay the bills. The more you stop using credit cards, the less you will fall into credit card debts.
5. Make seasonal adjustments for household expenses
Many flexible expenses change seasonally such as gas bill, electricity bill, water bill, etc. If you set these types of flexible expenses around the most expensive month in the year, you may not have to make seasonal adjustments. You’d rather see more savings in the months when you don’t reach the average limit. You should use that money to pay off debt, if any, so that you can get out of debt faster in the future.
6. Treat debt pay off as a mandatory expense
It doesn’t matter what type of debts you have, such as credit card debt, payday loans, student loans, mortgage, tax debt, and other expenses. Once you ignore paying such debts in a month, it will start generating more debt in the form of interest and late payment penalties.
So, you must include debt payments as a mandatory expense in your monthly budget.
How budgeting can stop you from going into new debt
It is important to take charge of your finances as soon as you understand why you need to avoid debt burden in the first place. Most of the time it is caused by serious spending issues. Your credit card bills are the prime reason for increasing debt load. Apart from that, utility bills are also one of the big factors that trigger overall debts.
So, following the below-given steps of budgeting may help you to stop evergrowing debts in a month.
- Buy with cash – If you can’t afford to buy a particular item or service, without a credit card, it is best to avoid it. If you have enough cash with you, use it promptly. It will limit your spending most of the time.
- Track your credit spending – If you still have to use a credit card, track how much and where you spend that money. Make sure to calculate how much time it is taking to pay that amount back through the credit card bill.
- Determine priorities – Remove the items from your list that you want but don’t need immediately. Things or services that are essential for you must be purchased, such as groceries, medicines, milk, vegetables, and services like power bills, water bills, etc. But you may easily skip an expensive wine bottle, or a costly chocolate box for the kids, or dining out at an expensive restaurant. Avoiding these luxuries may help you to pay off debt with ease, as the bill will be lower and affordable. It can help you avoid incurring new debt, too.
- Avoid cash advances – Never take out a cash advance by using your credit card. Credit cards have a high APR and the interest is charged daily. It will increase your debt amount way faster than usual.
- Pay off credit cards in full – Pay off your credit card debts in full every month. Most of the time people only pay the minimum balance in a month and leave the rest of the balance unpaid. As a result, the credit card company charges the interest, and the total credit balance increases. It will be easier for you to manage credit cards if you follow a budget plan with credit cards.
- Find options to reduce credit card bills – Use coupons, discount vouchers, as much as possible to reduce your credit card bills. It is practical to use 1 or 2 credit cards that offer great deals and discounts. So, instead of using multiple credit cards, use those two cards with maximum benefits.
Apart from that, using multiple cards may increase overspending as your credit limit will increase, and you might lose track of your spending. As a result, your total monthly credit card debts might get increased. So, limit the number of cards you have and lower your credit usage.
How to pay off existing debts through budgeting
- First of all, list how much debt you owe and to whom. Also, note the applied interest on every debt account you are paying. Once you get a complete picture, it will be easier to form a repayment plan and motivate yourself.
- Pay off debts as per their priority. Mortgage and vehicle payments should be paid first, as they are secured debts. But do not underestimate unsecured debts and make the payment on time.
- Develop a realistic debt relief strategy. Make sure you can cut off expenses from unnecessary items to generate some extra money by reducing overall monthly household costs. Do not forget about contributing to retirement accounts and investments. They may also help you to pay off debts when a situation calls.
- Once you follow a suitable budget and generate some savings, think about considering debt consolidation services under the guidance of a professional debt relief company. This way you may consolidate your debts at a lower interest rate, without incurring more debt.
- Have an emergency fund ready with at least 6-month of your paycheck. This will help you to get out of debt and cover your household expenses if you become unemployed, sick, or temporarily disabled.
- Increasing your total monthly income is also a part of a good budgeting strategy. By doing some side hustles if you engage more money into your monthly budget, you’ll have excess funds to pay off debts which you might avoid paying in the current month. This way, you can make an extra payment on the existing debts and get out of debt faster, along with saving from the interest payment. That means you’ll be paying less interest but become debt free faster.
There is no doubt that by using a solid budgeting strategy you can manage your money easily and handle your debts better than others. But forming a budget only won’t work if you do not follow it properly. Also do not expect to get a positive outcome from the first month. Initially, you’ll see a low amount of savings. But in the long run, you will be able to save a lot and become debt free.