One of the best tools that you can use to make debt relief easier is to have a working budget. Unfortunately, budgeting does not seem to be the top goal for a lot of people. One survey was done about financial goals. It mentioned how only 4 out of 10 respondents said that their primary goal will be to follow a budget.
This is unfortunate because the same survey revealed that 3 out of 4 American adults admit to feeling financial stress.
What makes a budget plan ideal is the fact that it can help you take full control of your finances. You cannot control something if you know nothing about it. A budget plan will give you an overview of your finances. It shows you how much you earn and where all of that money goes to. With this information, you can remain in full control of your situation. It will help you make informed decisions – especially about matters that will affect your finances.
When implemented properly, budgeting can really improve your finances. But there is one thing that you need to keep in mind. To make it really effective, you need to have a working budget.
What is a working budget and how to create one
The term is actually used in business. It means the budget is a work in progress. When you create a budget plan, it is not set in stone. You will follow it strictly, but you need to let it be open to change.
When you have a working budget, you need to look at it constantly. You have to always check that it is updated before you follow. And you need to be able to adjust it in a timely manner.
Your budget plan should have the same characteristics. This is the main tool that you will use to control your finances. It has to be effective – otherwise, it will be useless. Sometimes, there is no need to use extreme measures to improve your finances. You just have to make sure that you are using the right budget plan.
So how can you create a working budget that will make debt relief easier to do?
List your income
Start by listing your current income. It has to be your post-tax income. This means it is the amount that you get after all the taxes and deductions are done. This will give you a clearer picture of how much you are allowed to spend each month. It is important to know this amount. This is where you should base your lifestyle on. By doing this, you are ensuring that you will never overspend. For instance, if your post-tax income is $4,000, you should base your monthly expenses on that. It should not go beyond it. Because overspending means you are using debt. After all, what will you use to pay for the expenses that your income cannot cover? You will most likely be using your credit card.
Monitor your expenses for a month
Once you have a clear idea of your income, it is time for you to list your expenses. Do not just like the expenses that you “think” you spend on. You need this to be accurate. This is why you need to monitor your expenses for at least a month. Make a list of your expenses as you make them. This will help things be more accurate. You can use your smartphone to keep tabs. As you buy, take out your phone and take note of the expense and how much you will spend.
What is great about this task is that it will help you understand your lifestyle and expenses. It will show you the patterns and unnecessary expenses that you make. If there are mistakes that you make in your finances, this is your chance to correct it.
Rate your expenses according to priority
Once you have a list of your actual expenses, you need to scrutinize it. Start by arranging your expenses according to importance. This will depend on what is important to you. Obviously, the basic necessities are important. If you have debts, it should be a priority as well. Rank these according to what has the most negative effect on your life if you do not fund the expense.
This ranking is very helpful when you need to cut back on an expense. For instance, let’s assume you have an unexpected expense because your car broke down. Most people will immediately use their credit cards to pay for this expense. But that is the financial mindset that keeps you in debt. Instead of using your credit card to pay for it, make sure you cut back on certain expenses first. That way, you can avoid debt and still pay for it in cash.
Choose a tool to monitor your budget and finances
Finally, to create a working budget means using the right tools to monitor it. If you find the right one, it can even help you keep an eye on your overall financial situation. Since this type of budgeting strategy is a work in progress, you should be able to determine if it needs to be updated. Using a tool will allow you to easily look at your budget. If there is a change in your financial situation, you can immediately look at this tool to help you check if it will have a huge effect on your finances. If it does, then you need to correct that. Revise your budget to accommodate this change.
Why you need a working budget
You may be wondering, why is there are specific need for a working budget?
First of all, learning about different budgeting strategies is the best way to start fixing your financial position. This will be very useful for 43% of consumers who made a resolution to set and follow a budget. If this is your first time to use a budget, you probably don’t know what works for you. Knowing all the budgeting options will allow you to make a choice well. And having a working budget is the best way to start your way towards a great financial future.
Here are three reasons why this is true.
Your financial situation changes over time
Nothing in life is for certain. Your finances right now may be great but one event can turn it around. What will you do? If it is a bad event, you just have to find a way to survive it. Your working budget can help you through this. Just make sure that it is aligned with your current situation. If your income goes down, you want to be able to manage your finances well. A budget will help with that. But you want it to be flexible enough to allow these constant changes to happen.
You learn to be cautious when it comes to your finances
Having a working budget is good for you because it helps you be cautious about your finances. It is a work in progress, so you will always check on it. This can be a good habit to develop. You will always be checking your budget before you make a decision. This will decrease the chances that you will make a mistake in your financial choices. And we all know that one wrong move can change everything. So being this cautious will help protect your financial future.