Household Budgeting 102

So now that you have an idea on your income vs expenses and have a budget outline…what do you do ? 

Identify Problem Areas

After you’ve written down where your money goes, you’ll start to see your spending habits. More than likely, there are some categories that you can cut completely out or at least cut back on. Do you need to have that Starbucks coffee every morning? If you spend around $5 per day for a coffee, that’s $25 a week or $1,300 per year! Do you buy unnecessary groceries each week? Do you really need those chips or pretzels? It’s important to see where your weaknesses are when it comes to spending and keep that in mind when you’re working on your budget. If you’re behind on your bills, you may have to cut out those want expenses until your need expenses are caught back up.

Pay Off Debt

Repay your highest interest rate loans first.  Usually credit cards.  Then car payments and so on.  Call and see if you can negotiate to lower your interest rates.  If not, you can always switch to a new credit card that offers no interest for 6-12 months.  Make sure that you close* the other credit card and cut up the card.  Do not use your credit card unless you are able to pay it off at the end of the month. Let’s say you put $100 on your credit card bill one month and you are not able to pay if off at the end of the month and you only pay the minimum payment that’s $35. Let’s say the following month you don’t put anything else on your credit card and your new balance would be $79.24 (that’s with the 21.9% interest). You still can’t pay it off that month, so once again you pay the minimum $35 amount. The next month your credit card bill is $53.93 and you again pay the minimum $35. The following month (it has taken four months to pay the credit card off) you still owe $23.08. So instead of paying $100 for that item, you actually paid $128.08! You’re throwing away $28.08!

Once the credit card bill is paid off, go to the next highest interest rate bill… your car payment.  Are you paying out the nose for your car payment?  Can you trade it in and buy a used car?  Lower the payment and most of the time it will also save you money in car insurance.

Financial Goals

Even before you have your debt paid off you should have a 5 and a 10-year plan for your money.  Do you want to have your credit card and car paid off in the next 5 years?  Is it realistic?  Put that money that you save against your credit cards or other debt.  Or split that money in half and put half against your debt and half in an emergency fund.

An emergency fund is for those things that are unforeseen.  (Water heater going caput, washer breaks down, etc.)  Once you have about 3 to 6 months emergency fund saved….

Saving Money

Then put money away for retirement. Does your employer match money that you put in your retirement account? Check with your Human Resource person. Sometimes employers will match up to 5%. That’s FREE MONEY!

Once you understand where your money is going and that you are in control of it, you won’t be so stressed out.

Budgeting involves behavior change:

Realize that your budget is just a blueprint for your money. 

Decide where every dollar should go.

Give yourself permission to spend money.  You’re going to have to give yourself permission to spend money so that you can have fun without the guilt.

Set goals.  (Set realistic goals.)

Track your progress.

Remember, you didn’t get in debt overnight and it will take time to get out of it.

Don’t get discouraged.  You can do it.

Remember, Saving Money IS Making Money.

*Closing credit cards can also hurt you because it has established credit history.  Cut up the card and when they send you a new one with the new expiration date, use it for one thing and then cut up the card again.