If you want to improve the state of your personal finance, you will need to make deliberate budgeting moves. Paying for things and hoping for the best is not the way to get out of debt, improve your bad credit, or save money for future financial goals.
Instead of just winging it, you need a real plan. A budgeting plan that takes into account all of the details of your spending and helps you learn what you’re doing with your money and help you spend it more wisely.
Many people have done the basics already. You might already have your spending tracked. You probably have cut out fancy coffee drinks and know that building an emergency fund is essential. But there is much to budgeting that goes beyond the basics.
Go zero.
A lot of budgets include round numbers. We’ll spend about $600 on groceries. We’ll spend about $200 on entertainment. The problem with round numbers is that they leave money on the table that could be used for other things.
If you budget $600 for groceries, you’re going to spend $600 on something – even if it isn’t want you actually needed to buy. Be precise and go with a zero budget. Snip $20 here and $30 there and soon you’ll have quite a bit of cash to throw at debt or save for future needs.
Replace rather than eliminate.
The easiest things to cut in a budget are the fun categories like entertainment and food. For many of us, that means the things that bring us the greatest joy and relaxation have just been eliminated from our lives. The good news is we will save money. The bad news is we probably won’t save it for long.
Eliminating things you love or enjoy means you are using will power to stop yourself from doing something you want to do. Eventually your willpower will fail and you’re likely to splurge and fall off the budgeting wagon. Rather than cutting out your spending completely or even cutting down on your old favorites, try to make new favorites!
Find places to eat that have great specials. Go to new restaurants where you can split portions for less. Invite buddies to watch the game at your place instead of the local watering hole. They bring the (expensive) drinks, you provide the sofa and television.
Go old school.
There are lots of great apps and budgeting tools out there. But for some of us, using credit or debit cards to buy things means we can’t effectively monitor what it is we are spending. If using your cards is throwing off the budget, even if you have great plans to pay them off every month with a budgeted amount, take it old school instead.
Put the cards away. Take them out of your wallet. Get some paper envelopes and take out cash every month for things you need to buy. Pay cash for groceries. Pay cash for gas. You can track your spending and when the cash in the “entertainment” envelope is gone, it’s gone. Don’t need car repairs this month? The car repair cash can just accumulate for next month when you do need it again.
Clean it up first.
Old debt, especially debt with very high interest rates like old credit cards, can easily suck the life out of your budgeting goals. Spending hundreds of dollars on interest payments every month can make budgeting tight. If you have the discipline to avoid using your cards again, it may be worthwhile to take out a personal loan to pay off the card balances.
Personal loans will pay off the cards, help to improve your bad credit, and make it easier to pay down the full amount. You’ll make monthly payments for a set amount of time, and when you’ve made the final payment, your debt is all paid off. Your monthly payment for debt pay-off is likely to be far less than the combined minimum payments on your various credit cards as well, freeing up extra cash for the monthly budget.
Keep trimming as you go.
Your budget is a living and breathing thing. You will have some months when expenses are high. Other months will bring a bit of relief with a 5th Friday paycheck or lower bills. Not only that, but you will get better at managing your expenses over time.
As you get better at finding ways to reduce your spending or you pay off some of the more expensive cards, don’t let your budget expand again. Use your new budgeting powers to help you keep trimming the fat in other areas. Lease is up? Move to a less expensive unit. Cell phone paid off? Don’t buy another one for a year or two. Keep trimming the fat and living on less. It gets easier over time.
Prioritize your goals.
Once you have your spending well under control, you are hopefully paying down your debt and making improvements on your living expenses. You should spend some time thinking about your goals and what sort of financial contribution you need to make in order to have those goals work out.
Do you need to save for a big trip? A special party for a big birthday? Perhaps you’ve always dreamed of owning a motorcycle or sail boat. You might not have these things in the budget right now, but you can start saving for them easily enough by starting some sinking funds. Use these small savings envelopes or accounts to start saving now so that you can benefit from your hard work later.