How to Budget Your Way to Financial Freedom

Budgeting is never easy, especially after years of poor spending habits and bad financial decision making. However, with several basic tips in budgeting, you can reduce your debt-to-income ratio and start saving money to ensure your financial freedom. While the process will not happen overnight, and can best be described as moderately challenging, you can begin to reduce your monthly expenses and pay down debt.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

• Budget journal

1. Determine your salary and earned income after taxes. Review previous pay stubs to determine the most accurate assessment of your income. Only consider the previous three months and note any changes in hours worked before using the information in your assessment. You don't want to use pay stubs that do not reflect the number of hours you are currently working.

2. List all weekly or monthly expenses, including mortgage, auto loans, insurance, credit cards and living expenses. Determine the total weekly or monthly amount owed for all expenses. Subtract this number from your total salary and other earned income (such as alimony payments). Note the total amount of money that is available after expenses.

3. Determine your rolling or monthly expenses. Note the due dates for all expenses and record on a large wall calendar. With the large wall calendar in full view, determine when all monthly expenses like healthcare payments including prescription costs, home and auto loan payments, and credit cards must be paid. Pay these bills first, with the intention of paying on time and eliminating late fees and added interest. Add all expenses and then record the amount of money that is available for other nonessential expenses such as food and entertainment.

4. Budget to pay above the minimum payment for all credit cards. Most credit cards require a minimum payment of 10 percent of the credit card balance. When possible, pay up to 20 or 30 percent of the balance by or before the due date. Over time, you will save money in interest fees. Look at income and expenses to determine where additional costs can be reduced.

5. Eliminate indulgences like magazine subscriptions, meals in restaurants, cable television, name-brand fashions and movie rentals. This will increase your overall income and allow you to pay down credit and auto debt as well as save.

6. Pay off debt. According to Suzy Orman in "Women & Money," people in debt should pay debt from the least to the greatest amount. Whether this is a past due cable bill or a student loan, paying smaller debts will give debtors a feeling of accomplishment and reduce the total number of overall creditors as small debt accounts are closed.

7. Record all debt accounts that are paid and/or closed in a budget journal. Write down all incoming money and outgoing expenses. For example, write any unexpected expenses like vending machine food or traffic tickets.

Tips & Warnings

• Sign up for a credit counseling service. In some states, a high debt-to-income ratio will qualify some people for free credit counseling services. People wanting to apply for bankruptcy must participate in a credit counseling service.
• Never spend money you do not have; in other words, avoid credit purchases unless necessary.

References

• Money Management
• Suze Orman, Women & Money (2007), Random House Publishing Company
• 5 Major Rules of Family Budget Planning

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