Budgeting & Debt
Before you start making a budget, you need to understand how you already spend your money. The easiest way to do this is to separate your spending into three categories: fixed, variable, and wants.
Fixed expenses are typically your monthly bills like a mortgage or rental payment, loan repayment, insurance and utilities. Usually, fixed expenses stay the same from month to month and are essential for everyday life.
Wants are the nonessential purchases you make, like gym memberships, going out to eat, and electronics. As opposed to fixed expenses and variable expenses, your ‘wants’ expenses are not needed for everyday life.
Variable expenses include things like transportation costs, groceries, medical bills, and child care. Variable expenses are purchases that need to be made every month, but that don’t always cost the same.
Look at your expenses for the past 3-6 months to really understand how much money you spend in each category. When you understand how your money is currently being spent, it’s easier to see the areas of your budget that need some tightening or evaluation.
Budget To Pay Off Debt
Debts, such as student loans, credit cards, and a mortgage, can take up a significant portion of your budget. Unfortunately, things like going to the dentist and laundry, debt payment is something you have to do.
As part of the budgeting process, review your debts and your spending. Make sure you are paying off your debts, and not spending beyond your means.
Overspending is one of the easiest ways to lose control of your budget and fall into credit card debt.
Creating a budget can help you understand your debt and take steps towards eliminating it. Generally, debt payments should be considered a fixed expense. The payments are usually the same every month and must be made.
If you want more disposable income to spend on new electronics and daily lattes, pay off your debt to reduce your monthly fixed expenses.
Most people evaluating personal spending for the first time, tend to over react. All wants are slashed and the new budget includes a strict regimen of coupon clipping and home cooked meals.
Cutting out unnecessary spending is important, budgeting money isn’t an ‘all or nothing’ situation. Generally, the goal of a budget is to live and save responsibly within your means. If you are a foodie and love to go out to eat, then include dining expenses in your budget. It’s not realistic for a foodie to go from eating out every night to always cooking at home.
When your goals are not practical or realistic, it’s easy to overspend, get discouraged, and lose control of your budget.
Making reasonable compromises with yourself can keep you and your budget on track. For our foodie, the compromise might be only going to restaurants on the weekends. Look at your expenses carefully and be honest about your spending habits to make the best budget possible.
Birthdays, graduations, and holidays can be expensive. These events are an easy way to overspend and lose control of your budget. Thankfully we know exactly when these special events happen and can include them in our budget.
Taking control of your money isn’t a sprint, it’s a marathon. And each mile, or each month, can be completely different than the last.
Your budget should be a work in progress. Every month, revisit your budget and reevaluate your spending. If you know that a special event or an unusual expense is coming up, you can use your budget to plan for it. If you realized you overspent on gas, but underspent on groceries, tweak your next budget to reflect this change.
Personalize your budget to completely reflect your financial goals and needs. When your life or your financial goals and needs change, it’s perfectly ok to change your budget too.
A personalized budget is a crucial part of taking control of your money and achieving your financial goals. When you start getting serious about your personal finances, making a budget is half the battle. With these tips, you can tackle your first budget or improve an existing one.