This is Part 4 of Deliverance from Debt: Part 1, Part 2 and Part 3
For many people the word budget is synonymous with the word diet, that it must feel unpleasant and depriving. But I think the comparison is unfair, budgeting is about setting priorities for your money. Unless you’re Paris Hilton, money is a limited resource. Your needs and wants compete for the same funds, it’s up to you how to use them. Every budget is personal, the key is to develop one that works for you.
We’re going to use the information you gathered from tracking your money to develop a budget tailored to your life and your commitment to get out of debt. Don’t stop tracking your spending, the longer you do it, the more accurate your budget becomes. Over a short period of time you might miss the sporadic but expected expenses like car registration, annual subscriptions, back to school time and birthdays. These were my budget killers.
Fixed Expenses
Mortgage or rent, car payments and leases, student loans and some other debts are a fixed cost, they are the same month after month. These costs are often difficult to reduce, you would have to sell the car or house. Even then you would still have the expense of a place to live and some means of transportation. If your fixed expenses are high, it will be very difficult to get out of debt.
Variable Expenses
The amount you spend on food, gasoline, utility bills, dining out and many other categories varies from month to month. You will spend something, but exactly how much isn’t known. These are costs you can help control by cutting back or making more economical choices.
Irregular Expenses
Presents for birthdays or holidays, the car and auto club registration, a weekend out of town, these costs will come up from time to time but not every month. You need to estimate these costs and set money aside for them.
The Unexpected
Any and all budgeting attempts will be attacked by unexpected expenses, it’s written somewhere. You need to leave slack in your budget and/or save up an emergency fund to cover these costs. A lot of experts recommend a minimum $1000 emergency fund so when the car needs repairs, the cost doesn’t end up on your credit card.
Add it Up
Use the information you’ve gathered (tally of debts and money tracking) to create your spending categories. List how much you typically spend on each category, don’t assume you’ll suddenly become more frugal. Start with listing the minimum payments to your debts, you can increase it later as you adjust your budget. Add up all your monthly expenses and subtract them from your monthly income. Is the number positive or negative? If it’s negative, then your regular spending is driving you into debt and you must find ways to cut back. I’ve prepared a simple sample budget to share, with some typical expenses. Use whatever categories you like, families with kids will have different expenses than a young single person. Prioritize and Adjust
Your budget should reflect your priorities, are you comfortable with how much you are spending in each category? Are you getting deeper into debt each month? This is the time for hard choices, where can you cut back? Expenses are either discretionary (at your choice) or non-discretionary (can’t do away with). If your budget is negative, start cutting the discretionary expenses. The balance at the end of your budget needs to be $0 or above. Any leftover money should be put towards your debts, if you only make minimum payments it will take decades to pay off. In my sample budget there is $70 leftover after expenses, that money should be redistributed to debt.
To really focus on your debt, you should adjust your budget to cut where you can and add the difference to your payments. Start with your discretionary expenses since they are the easiest to adjust, can you eat-in rather than dining out, switch to a cheaper phone plan or drop the cable TV? Would you rather have a new outfit, or peace of mind? If cutting back on discretionary expenses isn’t enough, you’ll have to find cheaper ways of meeting your needs. Ditch the car for public transportation, move in with roommates and find cheaper ways of eating. Look to cut back in categories that are less important to you, but don’t make your budget a punishment for past mistakes. If you can afford it, keep some money aside for the occasional indulgence.
A Tool to get out of Debt
A budget is a powerful tool for getting out of debt. Use it to evaluate your spending needs versus your spending wants. This is your plan to attack your debt, how much can you put towards it each month? How can you maximize that amount? Ask yourself how you can improve - budgeting is a constant process. A budget needs to be evaluated, revisited and refined as your priorities change, your goals are reached and new needs develop.
There is no right way to budget, there is only one criterion all successful budgets must meet – does it work? Are you getting out of debt, saving up for the future, meeting all your needs? Or are the bills going unpaid while the debt mounts up. As long as it meets your goals and keeps you out of debt, do whatever works for you.
Budget Resources
Quicken Online (Online/Free)
Mint (Online/Free)
Mvelopes (Online/Pay)
You Need a Budget (Online/Pay)
Quicken (Software)
MS Money (Software)
Mint (Online/Free)
Mvelopes (Online/Pay)
You Need a Budget (Online/Pay)
Quicken (Software)
MS Money (Software)
Part 5: A Plan of Attack
Posts
4 comments:
Hi there-this is a fabulous series of posts and I totally agree on working with and sticking to a budget. Its a must to eradicate debt and build savings, plus paying bills promptly too. For this year, my irregular expenses amount is very low, as you know I wnat 2 of my loans paid in full in November, so I've cut back on this expense and also my weekly cash expenses is cut down too. Its not long to wait, then I will have this money being paid to myself, rather than the debt companies, oh joy!!
Excellent series, I agree! I've got my recurring expenses down pat. What always kills me are the irregular expenses, particularly birthdays. This goes back to your post on tracking spending.
This was a really wonderful series. I found everything well written, concise and wonderful.
If people aren't into using budgeting tools, they can build their own budgeting Excel sheet, or use paper, which may be easier for some.
Fabulously Broke in the City
"Just a girl trying to find a balance between being a Shopaholic and a Saver."
Great series of posts and I like the new template :)
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