Thursday, April 23, 2009

How to Manage Your Income Through Budgeting

As the effect of the current global financial crisis continues to bite hard on many families, finance experts have advised that the only way out is for people to cut down expenditures and ensure that their income generation is more than their daily expenditure. This will help to cushion the effect of incessant job cuts and wage slashes accompanying the crisis. It is obvious that the level job losses that have accompanied the crisis will put many families in serious financial problem except the few who have planned their daily expenditure to match their scarce resources. The only way to join this club of financially wise group is to budget every expenditure you want to make.

Budgeting can be defined as art of setting a target of what an individual plans to achieve within a specific period of time and the means through which such target could be achieved. It spells out what an individual would do in order to achieve the target over the specific time or period. In budgeting, the individual usually maps out financial resources that will enable him achieve his set goal without wastage of his scarce resources. Here comes the need for planning and judicious allocation of your finances to achieve your set goals.

Managing your finances is never easy, just ask any of the millions of people who struggle on daily basis to live within their means. The key to successful financial management is effective budgeting. Unfortunately, creating a budget and sticking to it can be extremely difficult, but it is achievable when you determine to get out of debt by restricting your expenditure to your income. Experts said there are two ways to get more money to pay off debt, one way is to stop spending as much and the other is to make more money. The reality of what got a person into debt in the first place was likely due to a lack of budgeting each month. Even if a person did make more money it still does not guarantee that he will live within his pay check. Sometimes unfortunate events like medical bills can creep in, but with budgeting in place it can help to prevent you from coming up short for these unexpected events.

A budget sets limits on spending and also encourages planning too. People that do not sit down and calculate their living expenses may be in for quite a shock. By understanding where the money is being spent, it may help to trim expenses here and there to make a few extra dollars to pay off a debt on a credit card.

Not only is a budget good for knowing how much you spend, it also sets you up for starting a savings account in the future. If you don’t have 5-6 months of living expenses saved up, it is unlikely that you are in a secure financial state. By being proactive for the unexpected events, you could avoid the downward spiral of getting in debt. As many have experienced first hand that once you are in debt, it is difficult to get out of it. That is why every pence does add up, no matter how little.

The more debt you owe, the more interest you are paying, and this increases your living expense. There is something awful about credit card debt, and now with the double minimum payments, it is really causing a lot of financial stress on families across the globe.

To make a budget you should take note of every bill that you pay in a month. And all the purchase you make at stores and eating at restaurants. If you have quarterly expenses like property tax, you should find the yearly amount and divide by 12 months to find an average monthly expense.

After you look at the totals, ask yourself if the car insurance is at the best rate it can be at and if you can shop around for a discounted rate. If you have a higher deductible on car insurance you can lower your monthly fees. You could possibly be over insuring your home and your vehicles. If you have need to change your car, you can consider buying used car instead of new one. This has the advantage of less insurance rates and less registration (depending on the country). You can also consider trade-in of your old car with the car manufacturer or dealer. This way, you only need to pay the difference in amount between the old and the new while you go home with a new car.

Distinguish between your “wants” and “needs” and see where all your money is going. You can even do it online. Prioritise your “wants”. This is where you are going to be making the big cuts, so figure out what you care about and what you can live without.

Eliminate the unnecessary. Consider lower-cost options for your “needs”. Can you get internet service cheaper from a different provider? Do you really need a cell phone and a home phone? Are the designer jeans really worth it? Assess, evaluate and make changes as necessary. Be realistic. Be careful not to get so idealistic that you create a budget you cannot live up.

To start saving, treat your savings account like a bill, set a monthly amount for yourself (whatever you can afford) and start putting it away. Even if you cannot afford to save much now, the fact is it goes hand-in-hand with successful financial planning in the future. Be honest with yourself. Identify your spending habits and determine whether or not you need to exercise a little more self control. Start a spending diary. Keep track of receipts and monitor cash in-flow and out-flow to make sure you stick to your budget.

Avoid debit (or worse, credit) card. Get your allotted spending money for the month in cash.

Look at your living situation. If your living rent/mortgage is 25 per cent or more of your income, consider moving or getting a roommate or a smaller and cheaper apartment. Don’t go for a house which rent exceeds your housing allowance. In fact instead of exceeding your housing allowance, try save something out of your official housing allowance. The moment you go for a house which rent exceeds your housing allowance, you have automatically entered into indebtedness because you have to borrow from other sources to make up the difference.

Provided there is no threat to your health and life, you can handle some repairs in the house. Whether it’s fixing a broken toilet seat or replacing a light bulb, do it yourself. It’s not hard, it’s much cheaper and you will have a great sense of accomplishment after the fact.

Consider putting off from the control switch the light, television, stereo etc. when you are not in the house. This will certainly reduce your electricity bill. Put in lower-energy light bulbs. They last substantially longer while consuming much.

While you should not deny yourself personal care items, you should prioritise your spending so you don’t break the bank. Cut down on dry-cleaning , hand wash, saloon etc. Prioritise your products. Some items like facial cleansers, moisturisers and make-up, are worth splurging on (a little). Others like hair spray, soap, cotton swabs, may not be so much. Pick and choose , and cut back where you can.

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