In this guest post from Amy Nickson, she discusses how building a budget can reduce your debt burden and set you up for financial success.
A budget is a list of your household income and expenses. By following a budget, you learn to spend wisely and save money according to your own needs. A budget can help in many ways to ease financial stress because you know where your money is going and enables you to have a plan in case of emergency. Even if you have already accumulated debt, you can successfully pay off and avoid incurring more debt. Also, with the help of a personal budget, you can see where your money is going and will help you to keep track of it.
Formulating a budget is a good idea, as distasteful as the task may seem at first.
What is the best way to create a budget?
Though you can easily take advantage of excel spreadsheets and other budgeting apps, there’s nothing wrong with using an old-fashioned pen and paper while crafting your budget. The main purpose of the budget is to keep track of income and expenses and redirect your spending toward priorities.
Tip: Try to create a simple budget. Revisit it from time to time to adjust expenses as needed.
Here are some more advantages of formulating a budget to help you avoid incurring debt and keep your finances stable.
1. A budget helps you divide expenses carefully
You must learn to divide your expenses between fixed and discretionary spending so that you can easily set your priorities. Categorize your payments among the more important and the less important ones. Your home mortgage payments, utilities, food, auto loan payments, and car insurance premiums are examples of expenses that are high priority.
By creating a budget, you will see where your money goes and can identify priority necessities versus non-necessities, such as entertainment and dining out expenses.
2. A budget helps you save money for an emergency
An unforeseen emergency is one of the main reasons people accrue debt. When there is nothing set aside in savings, people typically either use credit cards or borrow money in an emergency situation. So try to set aside at least 10-15% of your monthly income for emergencies. Thus, you can avoid incurring debt in future.
3. A budget can help you to repay debts
Accumulating debt is much easier than paying it off. If you owe of debt, it’s important to keep current on payments as missed payments have many negative consequences, such as late fees and debts being sent to collections. Having a budget in place will help you find places to make cuts if needed and determine how much you can put toward debts. Making more than the minimum payment will save you time and money.
When creating your budget, don’t forget to include the debt payment amount. Also, it is a good idea to determine the best debt repayment option that will save you repayment time and money.
4. A budget helps you avoid excessive credit card use
The more you use credit, the deeper you’ll plunge into the cycle of high-interest debt. When your debt balances increase, so does your payment, which can lead to those debt payments being unaffordable.
To avoid adding on credit card debt, stick to your budget as much as possible. Using your credit card for unnecessary purchases will only make it tougher to survive financially. So live within your means and only buy what you can afford.
Bonus Tips: Stuff cash inside your wallet so that you can track how much you’re spending and on what. Avoid using credit cards if you don’t have the cash to pay it off right away. Also, when shopping, make a list and stick to it.
5. A budget can help you achieve financial goals
Until you set a financial goal, you will not be able to achieve it. Whether your goal is purchasing a home, going on vacation, a home renovation, or paying off debt, you need to continuously work on money management to reach your goals.
6. A budget forces you to become financially organized
I have already mentioned that you need to revisit the budget from time to time because expenses can change. Tracking expenses gives you a realistic picture of where your money is really going and you can make necessary spending changes. For example, if you notice you are spending too much on lunches at work, make a conscious effort to bring your lunch from home. Then you can put the money you are saving toward savings or debt repayment.
Finally, if you stick to your budget, you will be able to pay off or avoid debt and build up emergency savings, putting yourself in a more stable financial position.
Author’s Bio: Amy Nickson is a web enthusiast. She completed her graduation from Oglethorpe University, Atlanta, Georgia. She works as a financial writer and she shares her expertise through her crisp and well researched articles based on money management, money saving ideas, debt, and so on. You can follow her on Oak View Law Group where she shares her expertise on personal finance field.