Planning your monthly expenses is the most important step you can take to get out of credit card debt faster. However, the high percentage of people with high debt shows how few seem to realize that.
What exactly is expense budgeting? At its simplest, it’s a ledger detailing the spending decisions you intend to make. It estimates how you allocate enough money to cover expenditures such as food, housing, transportation and insurance. A good budget also includes allocations for regular savings.
Do you know? a few take the time to draft a budget. A Gallup poll showed only 32 percent of Americans have a budget each month. Even fewer, 30 percent, have a long-term financial plan. Instead, they rely on guesswork or a wish list of things they’d like to buy.
If that’s how you manage money, things won’t go well. Before long, your expenses easily outstrip your earnings leading to a financial meltdown.
First let’s dump the misconceptions about expense management. It isn’t about self-denial, though a solid plan usually contains an element of that. Rather, it’s about outlining your near-term financial future. That means, a plan for where your money will go before you earn it.
One thing you should keep in mind that monthly budget won’t protect you from disasters. However, they can help you avoid them. Unexpected car troubles or a big medical bill can disrupt even great plans. And, a good budget can mute the impact.
So, an emergency fund is a stash of money set aside to cover the financial surprises life throws your way. These unexpected events can be stressful and costly. Example: Job loss, Medical emergency or vehicle breakdown etc.
How to plan your monthly expenses?
It can be difficult to remember all of your monthly expenses. Start by listing out the bills you pay each month. These will likely include:
- Mortgage and/or rent
- Auto expenses: car payments, insurance, gas and tolls
- Student loans
- Subscription services: Netflix, gym membership, etc
After you’ve listed your monthly bills, add in variable expenses including:
- Food: groceries and eating out
- Pet expenses
The strength of a budget will be determined by how accurate it is. Look at 3 months worth of credit card and/or debit card charges to make sure you are capturing all of the categories where you typically spend money.
Once you’ve identified all of your expenses, add them up. How do your expenses compare to your income? Do you have a surplus or a deficit?
If you have a surplus, consider how you’ll invest or save the surplus money.
In case of deficit, study the expenses and decide what to cut. If one of the biggest outflows is lunch at work, consider brown-bagging it four days a week. If it’s a cable TV bill, go for a cheaper plan or cut the cord. A big cellphone bill? Find a cheaper plan or a less expensive provider.
Tips to plan your monthly expenses
- Don’t confuse luxuries with necessities. Eating is a necessity. Eating at a four-star restaurant is a luxury. If you have to trim expenses, pare back on the luxuries.
- Watch the small stuff. If you like passing time in coffee shops, add up what you spend each month. If it is huge, then drink water sometimes. Or work at home and make your own coffee.
- Restrain yourself. Just because you earn a raise doesn’t mean you have to find new ways to spend money. Consider saving part of it or contributing more to a retirement plan.
- Use cash. Credit and debit cards are great conveniences, but also easy to overuse. When you spend cash, or write checks and enter them in a register, you’ll more accurately see what you are doing with your money. Finally, using cash isn’t an excuse to visit an ATM when you get the urge to spend. Use your budget to set limits on yourself and keep receipts to monitor your progress.
- Manage your own debt. If you have a growing unpaid balance on your credit cards, part of your budget should aim at bringing the balance to zero. Paying revolving credit card debt is one of the least useful ways to spend your money.