A budget method sets out how an individual, company, or organization plans to spend money over a period of time. Budgeting methods vary by needs, but a failure to budget is a quick path to long-lasting debt problems. The process constitutes a critical part of your financial plan. Yet, nearly one in every three respondents of a 2019 survey admitted to not preparing a budget. Though not a majority, the proportion of those who live without a budget is sizable. It also speaks to some concerning statistics regarding overall financial awareness, even among those with well-paying jobs or income sources. Here Are A Few Shocking Financial Statistics:
The Stakes In Not Using A Budgeting MethodAs we explain below, the monthly budget process helps you identify where you spend or may have to spend money. If you don’t grasp the dollar amounts necessary to live, drive, or maintain a home, you might fall into bad spending habits that deplete your funds and leave you unable to address the essentials. When those necessary items arise, you may gravitate to credit cards or using retirement funds or savings accounts to make ends meet. Lower Credit ScoresThe accumulation of debt brings more than added monthly spending obligations. As you become more reliant upon debt, you can drive down your credit score. Nearly 30 percent of the credit score used by mortgage companies, employers, landlords, and others comes from your “credit utilization rate.” This figure is the total balance of your credit cards divided by the credit limits (or borrowing limits) of your credit card accounts. Generally, strive to keep the credit utilization rate below 30 percent. Legal ActionsMissing payments places you in default on your loans or credit cards. Defaulting on a mortgage will subject you to foreclosure, and missing car payments lead to repossessions and deficiency judgments. Creditors, including card issuers or collection agencies, can institute or threaten lawsuits. The specter of collection litigation may contribute to bankruptcies. As it relates to budgeting, an estimated 44 percent of study participants cited spending above means as a factor in filing bankruptcy. Unaffordable mortgages and foreclosures contributed to 45 percent of bankruptcy filing decisions. At nearly 78 percent, loss of income ranked as the highest contributor to bankruptcies. Savings StatisticsWhen you budget, you probably will find yourself taking savings seriously. As mentioned above, the loss of income constitutes the biggest factor in bankruptcy filings. A healthy savings account and emergency savings can lessen the sting of a job loss or significant cut in pay and delay events such as foreclosures, repossessions, or bankruptcies. Plus, you can address unexpected financial emergencies without having to charge your credit card. Through budgeting, you can plan for retirement or higher education savings by creating better financial habits. As shown by statistics and studies, many Americans do not significantly include savings in their financial plan:
Future Marital Discord And Relationship ProblemsMoney issues can disrupt wedded bliss. Studies generally rank finances as either the leading or second leading cause of divorce and other marital conflicts. Seven out of every ten couples rank money as the top argument among spouses. Nearly 35 percent of couples attribute money and poor financial health to discord in the marriage. The deception may become unraveled when a spouse discovers unfamiliar purchases or bills on a bank account statement, a checking account with a zero or negative balance or collection, eviction, or foreclosure notices which suddenly fill the mailbox. The Essentials Of A Proper Budgeting MethodBelow, we will discuss various alternative budgets. Whatever your budgeting strategy, a few general budget categories and principles should guide your approach. Mandatory Expenses In Your Monthly BudgetNormally, any budget plan includes a category for necessary expenses — items for which you must pay each month. In this spending category, you will find expenses imposed by law and contractual obligations for debt repayment. Mandatory expenses also include essentials for living. Below are typically mandatory or essential, budgeted categories in your budget:
A Budgeting Method With Discretionary ExpensesYou may consider discretionary expenses to be “wants” as opposed to needs. That is, you do not have to spend on these items to live or satisfy your debt or government-imposed financial obligations. Within the discretionary set lie items such as:
Those items that generally are mandatory have discretionary elements. While you must have food to survive, it does not have to come from a restaurant. Many types of foods, especially pricier ones, do not qualify as essentials. You can hardly go without clothes, but name brands and designer outfits and separates are not mandatory expenses. Budget Targets For Fixed ExpensesYour budget consists of many expenses for which you can prepare ahead of time. The fixed expected costs do not change when they become due. Some of these, such as student loan payments, mortgage, insurance premiums, and vehicle loan payments, are also mandatory. The bills for cable, satellite, streaming services, and magazine subscriptions typically have fixed payments as well. Variable ExpensesVariable, or irregular expenses, in your budget likely will fluctuate. Your electricity and water bills depend upon how much of these utilities you use each month. Especially extremes in temperatures or prolonged periods of hot or cold weather cause higher than anticipated heating or air conditioning use. You likely increase spending on gifts during the Christmas and Holiday seasons, while your budget in summer months might take into account spending money on lodging, airfare, increased driving, meals, and vacation spending. Times Of The YearWe’ve already touched upon seasonal costs such as holiday gifts or summer vacations. Your budgeting strategy should take into consideration those obligations that rear themselves periodically. Insurance premiums may come due every six months or one year. Figure into your budget, inspection and registration fees, and property taxes you pay once every year. Planning For The FutureA sound financial plan should include long term savings.
Use Calculators To Estimate Future ExpensesWhat you will need to pay for college or a home depends on the school or kind of home you seek. Sites such as College Board provide online college cost calculators to gauge the price tag of particular institutions to which you aspire. These and other calculators afford a glimpse of how big you need to build the nest egg for higher education and the amount of money you need to set aside monthly for college. In particular, use 529 College Savings Plan calculators for the amount you need to set aside monthly. These plans allow you to save money tax-free, so long as the money goes to eligible college expenses. Use Cash To Your AdvantageIn buying a home, you likely do not need to save for the entire purchase price. Being able to make a down payment is the primary savings goal as a home buyer. Under the U.S. Department of Housing and Urban Development, programs allow you a mortgage with down payments as small as 3.5 percent of the purchase. The Budgeting Methods – Your Definitive Guide For All Types Of BudgetsThe Traditional Budget: Income Less Expenses (Basic Budgeting Method)The traditional way is a budgeting technique rooted in the business and corporate world. For those of you with the time, orientation to details, and analytics, a traditional budget method can serve your personal financial management. Choose Your Budgeting StyleYou will find an Excel application, Google Sheets, printable budget template, or budgeting app program beneficial to use traditional budgeting. You list your take-home pay and other income you received in the period. If you’re basing the budget on a year, find your W-2 form and subtract the taxes withheld for the state, federal, FICA (Medicare), and Social Security from the gross income. You might consider the Social Security gross salary and wages. As an easier approach, use your final pay stub for the calendar year or total the paystubs in the particular previous month. Track Your ExpensesYour ability to track expenses by type is important to the usefulness of the traditional budgeting technique. Check with your bank for options to get spending reports. Several apps also accomplish this goal. On a daily or regular basis, you might wish to record and label your Excel spreadsheet expenses.
With eating out in particular, a family of four might lower the restaurant bill by at least eight dollars by not ordering sodas. At many restaurants, sodas run north of $2.00. Change Your Shopping HabitsCertain shopping habits might promote less driving and, thus, lower gas bills. Consider online ordering, especially if you can avoid shipping and handling charges. Take inventory of your grocery stock and plan meals so that you reduce the number of times you need a grocery store run. Grocery store trips to buy one or two items for a meal takes gas. If you need to supply something in your home, consider going while you are already out of the home, perhaps after work or while performing another errand. Zero Based Budgeting Method: AKA Zero-Sum BudgetThe zero-based budgeting technique promotes discipline and careful tracking of your spending. In this approach, you give every single dollar that you bring home a task. Since you account for every dollar of income, you should not have any money left over in your budget at the end of the month. (-)Expenses:
(=)Total Expenses $3,000.00 Proportional Budgeting SystemsIn a proportional budget, you devote a certain amount of your income each month to specific categories. Unlike the zero-based method, you focus less on specific items. Instead, general areas of expenses guide the budgeting process. The 50 30 20 Budget MethodMany proportional approaches allocate fifty-cents of every single dollar to the mandatory expenses. You use 20 percent of your after-tax income for items such as retirement or educational savings, a fund to handle car or home repairs, a sudden job loss, and other emergencies. In other words, the 50/20/30 method calls for you to treat 20 percent of your take-home pay as generally untouchable except for emergencies and paying extra on your debts. The remaining 30 percent goes to your wants.
The 50/20/30 method carries the advantage of making you think about savings and emergency funds. When you budget for especially emergencies, you more likely than not will resist the temptation to incur credit card debt for repairs, meet unexpected expenses, or handle a drop of income. The 60/40 Budgeting StyleThe one-time MSN Money Editor-in-Chief Richard Jenkins developed another proportional budget. In the 60/40 approach, you spend 60 percent of your net income on committed expenses. This categorization of spending includes mandatory expenses and non-essentials to which you commit. By treating them as committed, your discretionary items in effect become somewhat “mandatory.” Of course, if you see some of the committed expenses busting the budget, you can eliminate them or find lower-cost alternatives. With enough income and an ability to shave expenses from your committed expense, you might reach significant savings goals and future spending power in a small number of years. Proportional Budgets For Would-Be HomeownersBanks and other mortgage lenders use a variety of percentage or proportional budgeting in loan underwriting. If you’re planning to buy a home, your monthly debt payments should not exceed 43 percent of gross (pretax) monthly income. In calculating this debt-to-income ratio, you include car loans, student loans, credit card debt, and the anticipated monthly mortgage payment in debt. If, for instance, you have a monthly gross income of $6,000, your debt payments should stay at or below $2,580 per month. Reverse Budgeting: AKA Pay Yourself First BudgetA budgeting technique, such as a proportional budget, stresses the value of saving money. Reverse budgeting takes that a step further by making saving the top priority. Most budgets have you start with mandatory expenses such as debt payments, food, and utilities. When you put the budget in reverse, you first decide how much to save and then treat the remainder of your income as available for expenditures. Envelope Budget AKA Cash Envelope MethodMany budgeting techniques focus on determining how much to spend on particular categories depending on your financial goals. With the cash envelope system, you’re mentally forcing yourself into a planned spending limit. The Cash Envelope System WorksThe cash envelope system allows you to see how you spend your money specifically. To see that you have run out of money for a particular category, say food, becomes a stark reminder to choose less expensive menus or grocery brands. Having nothing left in the gas envelope may spark a change in driving habits. Even writing down your purchases and withdrawals consistently or instantaneously do not mean freedom from math errors. When you fail to record transactions accurately, you run the risk of overdrafts and attendant rejection of purchases, overdraft loans, and fees or bounced checks that can land you in legal jeopardy. Plus, you might defeat the purpose of budgeting if you use gas to drive cash payments to the offices of your water, electric, cable, and waste collection providers. You might use the envelope for transportation, food, clothing, haircuts, and other goods or services offered in-store to solve that dilemma. The Advantages Of Budgeting Will Change Your Financial LifeThe budgeting method that works best for you is a personal preference and depends on your financial situation, financial goal, goals, and ability to be detail-oriented. Whatever you use to create your budget, the exercise of budgeting should enhance your financial literacy, help you find approaches to debt repayment and other financial goals, and afford you discipline and structure in your spending habits. A successful budget involves total buy-in and a belief that you can achieve financial independence and finally fix your debt payoff problems. Chose one of these simple budgeting methods to take control of your financial future and reducing your overall money stress. *Illustrations by Freepik Stories Via https://arrestyourdebt.com/best-budgeting-methods/
0 Comments
Leave a Reply. |
Arrest Your DebtArrest Your Debt is a personal finance website with one main goal: to help you get out of debt and start building wealth! |