Most of debt problems are caused by improper money management. Statistics show that the household debt ratio reached a record of 123% in year 2007, revealing that the debt is increasing more than the income. This figure shows the average household does not have a good control on how they spend their money. In fact, they spend more than their income; this is the key reason that causes many of them trap into debt troubles. If you want to be truly debt-free, gaining and maintaining control of how your money flow must be the top priority in your financial planning. The most important step in money management is creating a household budget to help you control your money and avoid yourself from trapping into debt problems.
The rule of thumb, in order to have positive cash flow, the household income must be greater than household expenses. Therefore, you should keep this in mind when planning your budget plan. If it works the other way round, you will have negative cash flow; meanings that you need to borrow money, which you may using your credit cards to cover the extra expenses. A household budget works with the purpose to let you have a better control on how your money flows.
The problem of many debtors who are suffering from overwhelming debt is either they don’t have a household budget or they can’t stick to the household budget they have planned for. Without a household budget or a budget that works, they won’t know where their money is being spent and they can’t in-line their expenses with their income. That’s why they never will have income that is great enough to keep them out of debt.
Knowing the key reason of most people get into debt problem is they fail to manage their money with a household budget. If you want to avoid yourself from getting into the same situation, you should plan a household budget that helps you to generate possible cash flow and follow the budget strictly to ensure you spend according to what you have planned for.
Setting up a household budget is not as complicated as many people think of. Generally, it involves below 7 simple steps:
1. Determine your monthly earnings from all income sources.
2. List all monthly expense and bills.
3. Allocate a buffer of 5% for any unforeseen spending.
4. Cut down or eliminate expenses that are optional.
5. Track what you have spent.
6. Allocate a portion of your earnings into your saving account.
7. Review and adjust from time to time to make sure the household expenses are within the budget.
Impulse buying and the convenient of using credit card for cashless purchases are the two major factors that might cause you to overspend. Therefore, you should reduce the use of credit card and buy items with a pre-planned shopping list. If cashless purchases cannot be avoided, make sure you have tracked them into your expenses tracking record to make sure you stay within your household budget.
Summary
Statistic results show that many debt problems are caused by improper money management. In order to have good money management, you will need a household budget that works to help control your money and avoid yourself from trapping into debt problems.