Once you have completed bankruptcy or otherwise resolved a debt crisis, you doubtless want to avoid a similar situation in the future. The most important tool you can use to reduce the risk of developing debt problems is a budget.
Many blogs and articles offer advice for improving your finances. Most of these boil down to one thing: creating a budget and sticking to it. There is no one-size fits all solution for budgeting. However, careful attention to a few simple factors can assist in keeping you out of financial trouble.
- Know how much money you make
This may seem obvious, but this is easier for some than others. If you are on a salaried pay scale you can easily calculate your monthly income. But, for hourly employees or those who own a business (i.e. those with variable income), this can be more difficult. In order to set a budget and make it work, you need to determine the average monthly amount of income that you take home. If you receive variable income, it can be a good idea to average out the last 6 to 12 months of recurring income and use that as your monthly average.
- Define needs and debt vs. wants: budget for reality
Once you know your income, you can create your “baseline” budget. This is the minimum amount of income you must apply to your needs and debt each month. Then, after these categories have been allocated you can consider additional debt payments and/or wants. In creating this “baseline” budget, it is important to be real with yourself. Budget for reality and not what you hope to do. For example, if you tell yourself you are going to cut out take-out coffee, but know that is not a possibility, add the cost to your food budget and see if it fits. Then, try to stick to the “baseline” budget.
Needs: Create categories for your needs first. Needs are going to be obvious cost of living expenses, such as:
- Housing (rent, mortgage, homeowner’s association, maintenance)
- Utilities (gas, electric, water, cable, garbage, internet, phone)
- Childcare (daycare, babysitting, after school care)
- Child activities
- Transportation costs (car payment, maintenance, gas, bus/train passes)
- Food (groceries, dining out, coffee)
- Other insurance (health, life, disability, long-term care)
- Healthcare (dental, physician, prescriptions)
- Clothing (purchase, dry cleaning, laundry)
- Pet Care (food, veterinarian, supplies)
- Job expenses (uniforms, dues)
- Gifts/Charitable Donations
Debt: Debt payments, besides regular mortgage/car payments, also need to factor into your budget. Of course, you want to try and pay more than the minimum each month on your installment debts (especially credit cards and student loans), but make sure to budget your minimum credit card payments and fees, student loans, personal loans, and any other installment debt. Also don’t forget to budget for variable changes in interest rates, changes in minimum payments, etc.
Wants: It is human nature to want to add things to our budget. Wants are things that are nice to have and may enrich our lives or make us feel good, but they are not truly essential to live. Wants and needs can vary greatly depending on your financial and lifestyle circumstances. Take some time to consider your true needs vs. wants. Do you need that gourmet $5 coffee? To dine out for $30 two times a week? Premium cable channels? A few dollars each day or week adds up over a year!
- Know how much you owe
In order to determine your debt payments above, you must know how much your minimum monthly recurring debt payments are. This should be easy to calculate, assuming you have stopped incurring additional debt in the short term. To find out what your monthly recurring debt payments are, calculate the total amount owed on each debt and add them up. This includes car loans, mortgages, credit card debt, student loans, and other monthly debts you pay.
As a tip, the minimum payment is only a starting place in your budget, but if you have a surplus after your minimum budget requirements are met, you may consider paying extra over the minimum each month.
- Think beyond 30 days: annual expenses
There are some bills that need to be paid less often. Examples might include taxes (federal, state, local), gifts, insurance, holiday expenses, school supplies, or travel expenses. To make a budget work successfully, it is important to know what these expenses are and to save for them over time. Too often, it is easy to play the “I will come up with the money later.” A good practice is to calculate your annual expenses and then save for them monthly (e.g. Annual expenses of $1200 = adding $100 a month to monthly budget). Then, the next step is to actually save this money and use it when needed for these annual expenses.
- Track your spending
There are many ways to track your spending. Paper and pencil. Apps. Online software. Computer-based budgeting programs. Use whatever method works; a budget can only be as successful as knowing how much money you spend in relation to your income.
- Plan for Savings
- Emergency Fund: Building an emergency fund is important to making a budget work in case of unexpected expenses. If needed, start small ($25 a week or $50 a month), but adding this to your budget will create a cash reserve for that unexpected car repair or medical emergency.
- Retirement: Different financial professionals have varying opinions about saving for retirement while still paying off debt. This decision is personal. However, if your employer matches retirement savings contributions, be sure to take advantage of that. It’s free money!
- College Funds (529 Plans): If you have minor children you may consider adding this line item to your budget. Even $25-$50 a month, over years can grow to assist with post-secondary education.
- Adjust budget as needed
Budgets are meant to be flexible and revised periodically. Life is full of surprises. Things get more expensive, gas prices fluctuate, you may get a raise, or suffer a financial setback. Whatever the case, revisit your “baseline” budget and revise as needed.
If debt collectors are calling and you cannot pay, call St. Paul bankruptcy lawyer Gregory J. Wald at (952) 921-5802. Mr. Wald will assess your options and help you choose the best route out of debt.