Debt has been an increasingly common problem and, if left unchecked, can severely affect your financial future.
The temptation to take on debt is everywhere these days, from credit card offers for college students to car loans to mortgages. While some types of debt may be necessary, debt is an issue that must be handled responsibly.
Fortunately, there are some simple steps you can take to avoid getting in over your head.
The benefits of a budget
Not keeping track of income and expenditures is a great way to fall into debt. A simple household budget that outlines income and expenditures on a monthly basis is a very convenient and effective tool to avoid falling into debt.
A budget forces you to see how you spend your money and presents your financial data in an easy format to follow. The bottom line is that a budget is a way for you to hold yourself accountable.
Seeing all the small expenses that add up to a lot of money each and every month can be very powerful.
How to construct a budget
Constructing a budget is not as complicated as many think and is time well spent. The simplest way to build a budget is to itemize all monthly expenditures.
These will include all monthly expenses including mortgages or rent, utilities, car payments, credit card payments, food costs, fuel, student loans and other miscellaneous expenses. It is important to include any and all expenditures on this list.
Next, you will list all sources of income. This will include your full-time job as well as any additional income you may get regularly from a second job or other source such as dividends or rental income.
Determine your totals
If you have bills that vary from month to month, such as electricity or gas bills, you may want to take an average of the last several months to come up with a budget amount.
Better yet, consider using the highest bill amount of the last 12 months. By using the highest bill amount, you may have extra funds built into your budget for that bill each month, and the excess money can be used elsewhere such as credit card debt or for an emergency fund.
Now, simply subtract your expenditures form your income and determine the total. In order to avoid incurring debt, you must have money left over.
If you are breaking even or your expenses are more than your income, you will have to consider some ways to earn additional income or ways to cut expenses in order to avoid debt.
Any excess money left over should be used to build an emergency fund and savings portfolio.
Consult the pros
If you’re having a tough time figuring out all the ins and outs of your new budget, consider meeting with a financial counselor. They can help you decide what amounts to allot where and give you advice on how to start putting away money.
If your credit score is low, you can start fixing it with the help of some professionals. According to the Lexington Law reviews, a credit repair company can help you improve your credit score. This, along with a professionally-reviewed budget, will help your finances for years to come.
Making a budget and sticking to a budget are two very different things. Keeping to a budget can be very challenging at times.
What about when you see a new car that you would like? Or perhaps you are longing for a Caribbean vacation during the winter. Maybe your friends all go out to dinner on a regular basis and you would like to join them.
Whatever the case may be, a budget only works if it is followed. If you have extra money left over or if you have money budgeted for going out to dinner twice a month, by all means feel free to do so.
If you are trying to get out of debt, however, these are expenses that can and should be cut to a minimum until your debt is paid.
A well-constructed budget can help you make the most of your money and climb your way out of debt. Budgeting and paying bills on time will have the added benefit of improving your credit score. The key to getting out of debt is following a plan, and a budget provides the road map to being debt-free.
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