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Budgeting
Develop good habits before problems start
Even the most careful spenders can find themselves with too much debt. Often, financial crises result from circumstances beyond your control. Maybe you or someone in your family lost a job or became seriously ill. Sometimes people find themselves in over their heads financially simply because of unrealistic spending habits.
Budgeting The best way to deal with credit problems is to develop good habits before problems start. As a first step, you need to organize your finances and keep a budget. Even if credit difficulties are already a reality, a budget is a powerful tool for helping you get out of debt and maintaining good credit afterwards.
A budget helps you organize your spending. It tells you what money comes in, what money goes out and where the money goes. Creating a budget can also show you where some changes might be needed. It will help identify expenses that aren't as important to you so you can free up money for those that are.
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Keeping a budget
Creating a budget isn't difficult. All you need to do is spend some time organizing and planning. Once it's set up, a budget is easy to maintain. Just follow the steps below to help with your budget planning.
Step 1: Set your goals The first thing you need to do is identify your goals - a new home, an early retirement, even an education. You can group your goals into three areas: short-term, mid-term and long-term financial goals. Ask yourself: What's important to me? What do I need? What do I want? Your answers to these questions will help define your goals. If you're married, you and your spouse should discuss your answers and decide what your shared goals will be. Then put those goals in writing. Once you know what you want, you can begin to budget accordingly.
- Short-term goals: These are goals that you'll achieve in the next year or so. They may include paying off a Baht 40,000 credit card debt, purchasing a new television or refrigerator, or paying for a vacation.
- Mid-term goals : These are goals that you want to achieve in the next two to five years. For example, you may want to save for a down payment on a house or new furniture for your home.
- Long-term goals : These are goals that take more than five years to reach. Retirement savings and college expenses are common examples.
Step 2: Gather information Pull together the records of all of your household income and expenses. Be thorough and honest when estimating any expenses. Your budget should be an accurate picture, not a "best case scenario." Gather the following information:
- Paycheck stubs
- Last year's federal income tax return
- Checkbook registers
- Credit card statements (especially year-end summaries)
- Payment information for major purchases such as car loans and credit lines
- Financial statements from banks and investment firms
Step 3: Find out where you stand After you've collected all of the information, you'll use it to figure out what your spending habits are right now. This will help you see the relationship between your income and expenses. Don't worry if you use estimates for your first budget calculation. It may take a few months to find out exactly where you stand, but the first time should give you a good idea of what you're spending and where you're spending it.
You should organize your information into the three sections below. These three sections will be used to make up your budget.
- What you earn : Add your income from various sources, including "take-home pay" after taxes, commissions or bonuses, alimony, child support, Social Security or retirement benefits, disability, interest, dividends, etc.
- What you spend : Add your fixed and variable expenses. Fixed expenses are those that don't change every month (rent, mortgage, insurance, loan payments, retirement savings, etc.) and usually cannot be eliminated. Variable expenses are those that change (cable television, groceries, gas for your car, telephone, etc.) and could be reduced or eliminated.
- The bottom line : Subtract total expenses from total income. The amount left over is called "discretionary income". This is the money you can use for emergencies and meeting budget goals.
Step 4: Check your bottom line Your bottom line is the difference between what you earn and what you spend. It's a clear way to know if you're spending too much. If the figure is positive, consider increasing the amount you pay toward debt or adding more to your savings. If the figure is negative, you are spending more than you earn and probably financing the deficit with credit. If you're spending more than 15- 20% of take-home pay on repaying debts and credit cards, you could be in a danger zone. If your bottom line is negative, you need to examine each variable expense and decide how to bring your spending under control.
Step 5: Keep track of expenses After you do your first budget calculation, start keeping a monthly expense record. Even if your bottom line is positive, it's still important to learn everything you can about how you spend your money.
Carry a small notebook everywhere and record all purchases and withdrawals. You'll be amazed at what you learn about your spending habits. For example, many people find that they spend hundreds or even thousands of dollars each year on coffee, snacks, magazines and soda. People don't typically overspend in areas like dental care or groceries. They get into trouble with non-essentials - the things they could easily do without. The goal of tracking expenses is to understand where you're spending your money.
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