How To Build A Budget
A budget is of particular importance to those who are seeking to deal with their debt. The road to eliminating debt balances can be long, and the very first step is to create a plan.
What Is A Budget
A budget is a financial plan for a specific period. It takes earnings and expenses into account and formulates a concrete strategy designed to maximize one’s economic resources. A plan is necessary to set obtainable debt payoff and savings goals. Going through life without a plan can spell disaster for one’s financial future.
Example: Dave is trying to pay off his credit card debt of $4000. His monthly expenses include $1000 in rent, $380 for groceries, $200 in transportation, and $150 for minimum debt payments. He has also estimated $200 a month for miscellaneous expenses.
Dave can expect to take home around $3500 a month, $1930 of which is accounted for by the aforementioned expenses. This means that he has $1570 per month not dedicated to bill payments. Dave may decide to take half that amount, $785.50, and devote it to paying down his debt. This means that it would take Dave just over 5 months to pay off his credit cards.
How Does Budgeting Work?
- Determine Expenses: The very first step in developing a budget is to determine total monthly expenses. The more thorough one is, the more accurate the plan will ultimately be. This is crucial if economic resources are limited; there’s no point in cheating oneself while forecasting income and expenses. The best way to budget is always to be as thorough as possible with one’s expenses.
- Determine Revenue: Most people have a fairly good idea of how much money they’ll be bringing in per month. While some lines of work may not be as stable, determining income should be no issue for most.
- Budget Shortfall Or Overage: Before any type of financial planning can occur, one must determine if they’re bringing in more money than they spend per month and, if so, how much more. It’s important to know what amount of money is left over per month once expenses are subtracted from income.
- Set Savings & Debt Goals: Those with a forecast overage can decide how much money to dedicate each month towards a savings account or paying down debt.
- Track, Record, & Revise: Keep monitoring spending because additional expenses arise all the time. Should one notice a change in their spending patterns, their plan should be revised accordingly.
What Are The Advantages Of Building A Budget
- Insight Into Finances: It’s common for people to be surprised by how little money they have at the end of the month. If no effort has been made to track and analyze their expenses, it’s hard to overcome this issue.
- Helps Pay Down Debt Faster: Debt doesn’t pay itself off, it requires action. To determine what level of action can be taken to reduce debt one must thoroughly analyze their finances to form a realistic plan.
- Improved Credit Score: Because planning effectively ensures the on-time payment of bills and helps facilitate paying down debt, it can result in an increased credit score.
How to Use Leftover Funds
Sometimes less money is spent over a month than has been forecast. How an individual uses these excess funds is important.
- Debt Snowflake Method: This method involves saving small amounts of money by adjusting day-to-day spending habits and applying savings towards debt. If at the end of the month less money has been spent than expected, the difference can be applied to repaying debt.
- Debt Stacking: When paying off debt, it’s best to attack the account with the highest interest rate first. This is called debt stacking. Should an individual spend less than expected come the end of the month, they can pledge the extra funds towards the debt with the highest interest.
- Save: For those without debt, saving the extra money or building an emergency fund is always a smart option.
Budgeting Best Practices
- Devote 30% Of Income To Wants: Needs and wants are different. A need is something required for day-to-day living and work. Wants may improve quality of life but aren’t absolutely necessary.
- Put 20% Of Income Towards Saving & Debt: Most plans call for people to devote at least 20% of their income towards savings or paying down debt.
- Be Honest: There’s no point in lying about how much is being spent given this will only set an individual up for failure. The more thorough a forecast accurately outlines one’s expenses, the more useful it becomes for effectively managing finances.
A budget is necessary for every adult to live a financially secure life. This is true for those with debt and those without to get ahead financially and planning for a stable future.