Debt has long been a part of life, but in recent times, people have begun to dig themselves out of their financial holes. They are creating budgets and committing to saving. This requires a great deal of planning and effort, but in the long run, you get to live a debt-free life, free of most financial obligations. Many people have even been able to pay off major expenses such as their mortgage payments, just be creating a budget.
Balance Income and Expense
The first step to creating a budget is to match your income with your expenses. In order to create a budget, you must make sure you are not spending more than you earn. This includes credit cards, so if you are using credit cards to make ends meet, you need to eliminate a few items from your expenses. It might also mean increasing your income, if you are unable to cut enough expenses. Calculate your must-spend expenses for a month and calculate your income. If your expenses are still higher than your income, you will need to find a way to increase your income or pay off a debt completely.
Create A Surplus
Once the consumer has balanced his income with his expenses, the next goal is to create a surplus. This means you will have money leftover after your necessary expenses are paid each month. Even if the difference is small, it will still be enough to help you eliminate debt and create a cushion. Your first goal should be to use the surplus to pay down debts. Once debt is paid and a savings is built, you can use the surplus toward luxury items.
Remember, you should be saving during this entire process. When you create a budget, including “paying yourself.” Even if it is only $10 or $20 a month, it will accumulate over time. List your expenses and include savings as one of your expenses. Your surplus money should be above and beyond your savings expense. For instance, your initial budget might include mortgage, utilities, groceries, a credit card payment, $10 for savings, and $20 surplus. Once the credit card is paid off, you can increase your savings expense to $15 and your surplus to $25 (or whatever the amount not necessary to make the credit card payment). Once your mortgage is paid, you can boost your savings and surplus money even more.
Create a Realistic Budget
In order to create a budget that works, you must be realistic when deciding what you can live without. While cutting back is important, denying too much can lead to failure. When creating a budget, include a few fun items from time to time. If this is initially impossible because you are in a financial crisis, create a strict plan that has an end. Work toward the end goal and then reward yourself once the crisis is over.
Be Firm about Following Your Budget
While you should leave a bit of wiggle room in your budget, you should still be firm about following your plan. The trick is to create a budget with some wiggle room in it. This way you can stick to your plan and know your will be safe. If you create a too-strict budget and fail to follow it because it is too restrictive, you will be no better off than before you had the budget. Your best defense against financial failure is to create a reasonable budget and be firm about sticking to it.