10 Things You Need to Know Before Starting a Budget, Including Paying Off Debt, Improving Credit Score and Keeping up with the Joneses.
My Experience: Broke and in Debt
In 2008, I had over $50,000 in credit card and student loan debt. In addition, my wife and I had borrowed $140,000 to purchase a home. And we were expecting our first child.
I started waking up in a panic in the middle of the night. My mind was racing, thinking of all the debt and responsibilities that I had as a father and husband. Would we have enough money to keep us from going bankrupt?
I knew that something had to change in my life. I couldn’t keep borrowing money and buying things. My income was staying the same but my debt was increasing. So I decided to do some research and find a solution.
Today, I’m debt free. I’m not rich, but I don’t wake up at night worried about my credit card bills. Instead, I sleep well knowing that I was able to get ahead by paying down debt. I started a budget and found the discipline to stick with it. And you can do it too.
These are the 10 things you need to know before starting a budget.
Why Budgeting is Important
You found this article because you are searching for something. You are ready to move to the next level and to move past the obstacle that is in your way. At some point in our lives, we all want to win. We want get ahead, to own a home and not worry about debt. We want to take control of our life.
Budgeting is one of the critical steps that can help you take control of your life. In the process of taking control, we also prepare ourselves for better quality of life by having more money. Having more money means that you have more power to dictate the kind of life you want. Before we give you 10 things you need to know before starting a budget, let’s look at how budgeting can help you.
How Budgeting Can Help You:
7 Ways Budgeting Can Lead to a Better Life
- Improve your credit score
- Save for emergencies
- Save and invest for retirement
- Stop wasting money and curb bad habits
- Promote a healthy, meaningful lifestyle
- Buy a new home or upgrade your existing home
- Obtain financial freedom
1. Establish Your Financial Goals
Before you start budgeting, it’s important to know what your goals are. Knowing what you are working toward makes it clear in your mind. Budgeting can be a great personal sacrifice to you and your family, so you want to have and endpoint in mind.
Set reasonable goals for yourself. If you want to pay off debt, calculate how much debt you owe, determine what you need to cut and then create a timetable for reaching your goal. Stick to the budget and get it done.
2. Gather All Your Income and Expenses
Before you start your budget, it’s important to know where you stand. You want to know what you owe and how much you spend monthly. It’s a good idea to take a look at bank statements, credit card statements. You may even start keeping track of expenses on a daily or weekly basis. Once you know what you truly spend and how much you earn you can begin your budget.
3. Stop Using Credit Cards
If you are starting a budget, you probably have credit card debt. The problem with credit card debt is not the debt, it’s the interest. Every day that you maintain a balance on your credit card, interest compounds. Compounding interest works against you when you’re trying to pay off debt.
4. Cut Expenses and Control Spending
List Items To Remove from Your Budget: Memberships, Subscriptions, Etc.
No matter what kind of budget you have, its vitally important that you cut expenses. Before you start your budget, you must begin finding areas in your life where you can make cuts.
It is helpful to make a list of what expenses are required and not required. For example, paying for electricity is required; having a spa membership is not necessary.
Ideas for Budget Items to Cut:
Memberships (Spa, Gym, Entertainment, etc.)
Subscriptions (Magazines, news, etc)
New credit card spending
5. Balancing the Budget Can Be Boring
Create a “Vision Board” to Make Budgeting more exciting
Budgeting is not an exciting activity. In fact, let’s be honest: making a budget is boring. However, keep reminding yourself of how life will be better once you’ve made progress on your budget over time. If your goal is to pay off debt, celebrate the milestones as you pay each credit card off.
Sticking to your budget is playing the long game. You are making a sacrifice today so that you can live a better life in a few years. Some people create a “vision board” that they place on the wall at home. The vision board is visualizing through images where you want to be in the next few years. Do you want to own your own home or get a better job? Create a vision board and visualize success every day.
6. Protect Your Credit Score
During your budget journey it’s important that you monitor your credit. Part of your plan may be to pay off old debt and improve your credit rating. If so, you must monitor your credit for errors and for fraud. If your plan includes buying a home, you will want to have a good credit score. There are a number of companies that can help you do this.
7. Keeping Up with the Joneses
Don’t Pay Attention to What Others are Doing: Focus on Budgeting
Don’t get caught up trying to keep up with the Joneses. Who are the Joneses? Mr. and Mrs. Jones are your neighbors who live in the big, two-story house. They just bought a new SUV and a new boat. The Joneses always seem to have flashy, new things.
It takes some discipline and habit changes, but in order to be successful at your budget, you must forget about what the Jones family is buying. Remind yourself buying new things prevents you from getting ahead and puts you further behind in debt. What’s important is sticking to your budget so that later you can have financial security.
And if you really want to know about the Joneses, let me tell you. They are in so much debt from buying all those new things that they will probably be asking you for money soon.
8. Stop Investing and Pay Off Debt
I know this one sounds counter-intuitive, but it’s important so hear me out. Stop investing. Does it make sense to put money toward your 401(k) each month if you are having problems making your credit card payments?
When you stop investing temporarily, you will free up more money for debt repayment. With the extra money now available, you can quickly pay down credit card and other debt. Once you’ve paid down the debt, then you can return to investing.
9. Always Keep an Emergency Fund
Unfortunately, emergencies happen to all of us. Having money for an emergency is critical. Many investment and debt consultants recommend that you start with $1,000.
Emergencies can come in many forms. Examples of emergencies you should be prepared for include medical issues, home repairs, car repairs, natural disasters, etc.
10. Maintenance: Review the Budget
Revisit Your Budget Weekly/Monthly and Make Adjustments
It’s important to review your budget on a weekly basis to determine if you are meeting your goals. Are you sticking to the spending requirements that you set?
Revisiting your budget on a weekly basis will allow you to determine if the budget is working. In addition, you will be able to adjust it where needed.
You don’t want to cheat on your budget, but at times you’ll need to update expenses. In addition, you are compiling information over a monthly time period. As you gather this information, you will learn more about your own habits and how you can improve your budget.
For example, perhaps you spend less on fuel every week then expected, but you forgot to include the toll fees on your way to work each day. You will make adjustments to your budget accordingly.
Opportunity Cost – Get Ahead Today!
If you have read this far, then you are clearly here for a reason. You are determined to make a change in your life and your behavior. A budget can be a great tool to assist you in being successful in life.
Every day that you procrastinate to start a budget is just delaying your future success. We’ve given you the 10 things you need to know before starting a budget. Get started today! What have you got to lose?
Where do you start? We recommend Dave Ramsey’s book, The Total Money Makeover.
Need help with budgeting apps? We’ve got you covered. Check out Piggy Bank Coin’s links to more articles on personal finance below.
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