How to Reduce Debt and Budget for Personal Finances
Reducing your debt and budgeting for your personal expenses will give you control over the basic financial picture of your life. Budgeting gives you a clear picture of your future and allows you to enjoy your leisure time without worrying about creditors and unexpected expenses. It is a good idea for everybody to have a budget.
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Instructions
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Calculator Look over your bills and receipts, and write down your monthly expenses. This should include predictable expenses, like your housing (rent or mortgage payment), as well as categories of expenses, like clothing and entertainment. Be sure to include all of your utilities, like the Internet service. If you are a student, determine how much you spend on school each month, including tuition. Include the cost of commuting to and from work. Determine your debts by looking at all of your credit card statements. If you cannot pay off the entire amount, estimate a number that will be both feasible for your lifestyle and productive in terms of reducing your debt. If you have other debts, like a car payment or a student loan payment, include these as well.
After you sum together the total amount of your costs and your debts, you will have a good estimate of your monthly expenses.
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Categorize your expenses into essential expenditures and discretionary expenditures. Essential expenditures include electricity, food, water, heat, insurance, and housing costs. Discretionary expenses are expenses you have more control over. These might include leisure activities, vacations, new clothes and club memberships.
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Determine your monthly sources of income. In addition to your salary, estimate money from part-time jobs and stock dividends. Make an estimate if your monthly income varies from month to month, or you do seasonal work. If you have invested money in real estate, estimate how much money you make on a monthly basis, even if you are not paid consistently.
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If your expenditures are greater than your income, you are living beyond your means and must quickly develop a way to cut your expenses. Otherwise, you will not be able to make any financial progress and will find yourself constantly borrowing money.
Analyze your expenses and determine which can be decreased. Sometimes this means making small adjustments, like making lunch at home a few days a week instead of buying it at school or work, or raising the thermostat in the winter to reduce heating bills, or visiting thrift shops the next time you need a new coat. Or it may involve making a significant change, like doing without your car if you can live cheaper without it, or canceling your cable or satellite service and choosing to rely on online sources of TV programs.
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If your income is greater than your expenditures, you are in a good position to decrease your credit card balances, or your car or home loan payments. Specify the extra money you have each month to pay down your debts. If you can, pay the full amount on your credit card balances, because interest charges each month can cause your balance to balloon. Contact the lender for your home or car loan and ask about ways to increase your payments to reduce your principal. This will allow you to pay off the loan quicker.
Even if you are spending less than you are making, it may still be a good idea to decrease your consumption habits. It is recommended that people have a six-month reserve in case they lose their job or something unexpected occurs.
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Use the information you have collected to plan ahead. Set a monthly goal--such as, spending no more than you earned, or setting aside a certain amount of money to make extra payments on your mortgage--and write down how much you plan to spend on your different categories of expenses in order to meet that goal. If you divide your monthly figures by four, you can see how much money you can spend in each category for a week
. As you pay your bills, use your budget and see which expenses are higher or lower than your predictions. Your budget will change over time. Keep it in a visible place around your residence so that you can see it before making any major financial decisions.
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Tips & Warnings
It is helpful to use a partner when doing a budget. If you have a friend who can help you with your ideas, you will be in much better shape.
It is important to have a reasonable budget that you can continue to use over a long period of time. Do not pressure yourself to save money too quickly if you are new to budgeting. Doing so will be a frustrating and ineffective. It takes time to learn how to budget effectively.
References
- Photo Credit money, money, money image by easaab from Fotolia.com Paying Bills image by ne_fall_photos from Fotolia.com
