The single most important tool to get out of debit is a budget. Many people rebel against the thought of creating a budget. It seems so restrictive. After all, we earn our money; shouldn’t we be able to decide how to spend it? Actually, instead of being restrictive, making a budget is actually the most efficient way to decide how, where, when and how much of your money to spend. When you create a budget, you tell your money what to do instead of wondering at the end of the month (or year) where it all went.
There are three immediate results of setting a budget:
First, since you base it on your past spending, it shows you where your money has been going. If you can’t figure that out, then I recommend saving every receipt – even those for cash purchases – for the next 3 months. You can use that as an average for your budget. Just don’t forget to add in those quarterly or annual expenses that may not have occurred during that 3 month period!
Second, setting a budget is the best method of lowering your expenses. You may discover that you are spending too much money dining out. Did you know that packing a lunch every day instead of buying out can save you $1300 to $2600 a year depending on where you go to eat? You may also discover that your entertainment expenses could be cut back a bit. Instead of going to the movies every weekend, you may want to consider redbox rentals every other week. Even if your movie night only costs $30, going every other week instead of every week will save you $780 in a year. Of course, you may decide that your budget actually reveals you don’t make enough money. Knowing where your money goes each month may lead to a second job or at least some side jobs to bring in some extra income.
Third, it is virtually impossible to save money without having a budget. Money has this amazing ability to simply disappear over the course of the month. That’s why it’s so important to tell your money where to go.
Instead of looking at it as a “budget” that restricts you, look at it as a “spending plan”. I’m sure you’ve heard the old adage, if you fail to plan, you plan to fail. This is especially true where your money is concerned.
It’s interesting how many people complain about being in debt or about being broke, yet they don’t have a budget. Most people in debt can’t even tell you how much they owe! The basic rule of thumb is if you have more money going out than you have coming in, you have a spending problem that has led, or is leading you to, a debt problem.
Americans have recently gotten a little better about their savings. We now save a whopping 3-4% of our earnings. We used to actually be in the negative in this category – meaning instead of savings, we were spending like there was no tomorrow, withdrawing from our savings accounts and going deeper into debt.
Of course, making a budget in and of itself will not solve your financial problems. You actually have to stick to the budget you make. The first few months, this will probably be a challenge, and you will likely revise your budget a bit. You’ll find that you underestimated your spending in some categories which will require you to cut back on your spending in some of your non-essential categories.
But, following a budget will help you take responsibility for your personal finances by making you aware of how you spend your money. If you are overspending on wants and neglecting some of those needs (like paying off debt), you’ll see it in your budget. Then you have to be disciplined enough to stop.
As a general rule, if you have a goal in mind that is important and involves your emotions, you will be able to stick to a budget in order to achieve that goal. Being debt free is well worth the discipline and effort it takes to achieve. Imagine life without bills, money in the bank, retirement funded, and being able to decide how you want to spend your money this month – now, sit down and create the budget that will allow you to get there!