More people seem to fall in the debt trap every day, not only in the United States but also all over the world. Many are saying that the reason for this is the fact that loans are more easily available than they were a decade or two ago. However, while this might be true, it is obvious most of the people who fall into the debt trap are living beyond their means. They tend to spend more than they earn every month and therefore go for a loan to support their expensive lifestyle. As more loans accumulate, it becomes harder to repay them, and this is how their credit history gets ruined. In extreme cases, you will see a person losing his or her property to auction because they were not able to clear their loans on time. Therefore, there is a need to come up with ways in which one can control expenses and avoid unnecessary debts.
One of the main tools that can be used here is the ability to prepare a realistic budget and follow it scrupulously. The main and most essential idea here is not about preparing the budget itself but the ability to adhere to all of its terms. The main purpose of having a budget is to help you understand how much money is coming in and how well you can spend it without going beyond your limits. It’s a highly useful financial tool that can help anyone build a fruitful financial future if, and only if, you can manage it efficiently. It will help you get the most out of your income because it gives you a sense of control over your income. The big question is, how do you budget proactively to avoid debt and attain that financial freedom you have been looking for? These tips will be of great help to you.
• Choose a Comfortable Budgeting Format
There are different ways in which you can prepare, track and manage your budget, and you need to use one that is easy to understand. For businesses, one may require special software for budgeting because of the nature of transactions and the amount of money involved. The bright side here is that there are different free online software that you can use for budgeting.
For personal budgeting, you can still use software if that makes you feel more comfortable. However, it is not a must. You can choose to use a normal notebook and pen to track your daily or monthly expenses and incomes. Try and balance your expenses with the income you get. Keep in mind that the list of expenses should include a saving column because one of the benefits of proactive budgeting is to help you save more rather than spending or borrowing. For those who understand the basic of Microsoft Excel spreadsheets, you can utilize them in preparing your budget, and they are better than just a pen and paper. The good thing about using a spreadsheet is that it will neatly organize all your information and do all the math for you accurately.
• Prepare the Budget
Now that you know how you want your budget to appear, get down to the serious business of creating it. While it sounds easy to come up with a budget, you need to be categorical when preparing it to avoid doing a shoddy job whose impact does not reflect in your finances. Therefore, follow these steps to ensure you properly take advantage of your budget.
1. Set Realistic Goals
You need to have something concrete that you are looking forward to achieving with your budget so that you can remain focused on it. Your financial goals could be immediate, long-term or both. It’s more advisable that you have both long-term and immediate financial goals to avoid settling back into bad habits after fulfilling your immediate goals. While doing this, determine the goals that will cover your necessities and those that will cover your luxuries. Once this is done, it will be easy for you to prioritize your financial goals.
Immediate financial goals usually cover current expenses such as food, childcare, utility bills, household supplies, telephone bills, rent or mortgage payment, and car loans. Others in the same category include secondary needs such as clothing, vacations, dining out or subscriptions. The long-term financial goals, on the other hand, include investments, charitable donations or retirement savings. If you have any outstanding loans or other debt, set its payment under the current expenses because the faster you clear your debts, the faster you will attain your financial solvency.
2. Understand Your Incomes and Expenses
Some people just earn money and spend it without considering how they do it or how much they spend on different expenses. Now that you have your financial goals ready, have a plan on how you want to achieve them. To do this, you will need to evaluate and understand all your incomes and expenses. Prepare a list of all your monthly income sources. This should include your net salary, any bonus you earn regularly, or alimony payments, among other sources. If it is not possible to get the exact total amount, use a conservative estimate.
Prepare a list of your monthly expenses too. This should include your fixed expenses like rent, variable expenses like groceries or gasoline, and discretionary expenses such as entertainment or gym membership. Discretionary expenses are good for boosting life fulfillment, but if you are struggling to afford the basics, they should be the first ones to be cut from your budget.
3. Critically Analyze Your Expenses
While it can be difficult sometimes to increase your income, it is possible to control your expenditure to ensure you do not spend more than you earn. Therefore, you need to analyze your expenses to make adjustments that will help you reach your financial goals. Look for expenses that you can do without, especially on the discretionary category. One thing that will help you objectively analyze and adjust your expenditures is keeping records of all your purchases and deposits for easy tracking. Review every document that reveals your cash flow information to ensure that there is no error, and then use it to control your spending habits where necessary.
4. Review Your Original Budget
Now that you understand your incomes and expense and have already identified some of the expenses you are willing to shed, revisit your budget. You may find that your monthly income estimate was wrong and rectify it. If there are expenses that you didn’t include in the expenses column previously, add them to make sure you have the actual picture of gross vs net. Remove all the expenses that you have decided to remove and adjust those that need to be adjusted for you to balance your budget.
Congratulations! You now have a realistic budget that will guide you to your financial freedom.
One thing you need to know is that one budget cannot serve you for years to come because the world is not static and a lot of things will change along the way. Carry out periodic reviews to ensure you remain true to yourself. For instance, you can get a promotion, change your job, decide to go back to school, work fewer hours, or have another baby. You will need to adjust your budget to reflect these changes. You may also add a discretionary expense that you previously removed if you feel that you can now afford it.
The most important thing to remember is that savings must always be part of the plan because this is the only way you will be able to handle your long-term financial goals or financial emergencies when they emerge.
5. Committing to Your Budget
Preparing a budget is a great achievement in your effort to attain a sound financial future. However, your ability to fully commit to the budget itself will be tested for you reach this goal. Since budget is all about balancing, be realistic at all times and feel free to adjust it when other factors change.
• Managing Emergency Bills
Unexpected bills are sometimes quiet. In this case, set an emergency fund and save towards it, because if the emergencies find you without any financial security, your budget will be adversely affected. Insure the things that are insurable such as medical bills, home and auto. You may also consider taking a soft loan when an emergency comes up. Rather than affecting your budget with a large one-time expense, you add a small expense to help you clear the loan in installments.
A budget is a very important tool, and that’s why everyone should have one and be ready to commit to it. It will not only help you track your expenses but will also help you know where you have been irresponsible and therefore adjust for a better financial future for you and your family. With a budget, you will control your urge to borrow because it will never allow you to spend more than you are earning.
If you’ve employed all these strategies and are still struggling to keep up with your debt, there are other options available. Firms like Mountain Ridge Associates exist to offer debt consolidation loans to deserving individuals. This type of loan is meant not to increase the total owed, but rather to eliminate high interest payments by lumping all existing loans into one, lower rate package.
