A good budget provides a framework for financial stability and success. You build a stable money management structure that allows you to reach your financial goals. All of your monthly expenses should fit somewhere into that structure so you can avoid taking on high interest rate credit card debt for things that should be covered by cash.
Here’s a quick look at how a balanced budget works.
Building a budget starts by laying the foundation and adding up your total monthly income. Expenses should be separated between one of three levels – fixed, flexible and discretionary.
The first level is where all your needs with a fixed cost live. That’s any need with a cost that stays the same every month. The next level is where needs with no fixed cost live. In other words, things you can’t live without but the cost can vary from month to month. The final level is where your wants live. You know, the things that aren’t necessary but make life fun.
Credit card debt payments can live in one of two places in your budget, depending upon how much debt you have. If you have low balances and pay off what you charge at the end of every month then credit card payments live with those other flexible expenses. However, if you have large debts to pay off make big payments every month until you’ve paid it off in full.
Discretionary expenses are where all the fun and frills live in your budget. And this is where you should start if you need to make cuts to scale back. Savings often gets treated like a discretionary expense and shoved in with the rest of your wants, which means it can get lost in the mix or cut entirely. But really, savings should move in with your fixed expenses. Decide how much you can save each month and make that a set cost in your budget that you pay to yourself every month.
Once you’ve constructed a budget, you have to maintain it to make sure it stands up over time. Every few months compare your actual spending to what you planned to spend. This will make sure you’re keeping everything within the structure you set. This ensures that your financial house can hold all of your monthly expenses so credit cards don’t have to cover what’s been left out.
If you see you’re overspending consistently somewhere you may need to work on your budget again to make sure it’s not too bloated to fit the foundation. In some cases this may mean you have to cut something to make room. Eliminating debt or adding income will give you the ability to add these expenses back once you have room to fit them in.
For more advice about budgeting and managing money visit consolidatedcredit.org.
Budgeting Made Easy
How to build and maintain a stable financial house.
Without a good budget, it can be tough to keep your financial world organized so you can avoid challenges that often set you back. And while in the past budgeting was a hassle because you had to track everything by hand, you can find plenty of online budgeting platforms that do most of the work for you. Many of these platforms also have smartphone apps now, so you can manage your money at any moment from anywhere in the world – even on vacation to make sure you’re not overspending and putting your finances at risk with too much debt.
Why credit card debt moves around your financial house
As mentioned in the video, credit card debt can be considered either a fixed expense or a flexible expense, depending on your situation. Here’s why:
- If you start every month with zero balances and then pay off everything you charged in-full at the end of the billing cycle, then it’s likely that the amount of money you spend on credit card debt will vary from month to month, making it a flexible expense.
- By contrast, if you’re carrying balances over month after month, then you need to make a strategic plan to reduce your debt. In this case, you streamline your budget and cut discretionary expenses to free up the biggest set amount of money you can afford to use to pay off credit card debt each month. In this case, your payments are a fixed expense until the debt is back to zero.
Additional tips on adjusting your budget
Always keep in mind that your budget is not static – it changes, grows, shrinks and evolves constantly, so you have to review your budget often and make tweaks to ensure you’re managing your finances correctly.
The following tips can help you make adjustments promptly and correctly to keep a balanced financial house:
- After the initial setup, check your actual spending versus the targets you set at the end of each month for the first few months just to make sure your numbers are accurate and that your budget work.
- Once you know your budget is working, there shouldn’t be a need to review it as frequently, so you can let it run without reviewing it every month.
- However, your budget should be reviewed at least twice every year just to make sure you’re on track.
- These yearly reviews are best done in spring and fall because you have different seasonal costs that may require budget tweaks. For example…
- Budgeting for summer usually means higher utility costs and gas prices; you also want to include savings for vacations so your getaways don’t have to go on credit.
- Budgeting for fall and winter includes back to school shopping and the winter holidays – the two most expensive shopping events of the year.
- You also need to adjust your budget anytime there is a change in your financial situation. Examples of this include:
What to do if you can’t fix a bloated budget
If you’re having a budget challenge that you can’t seem to fix on your own, we can help. Credit card debt and other debt payments are often the prime culprits in causing financial instability. If you’re running the numbers and you just can’t seem to make everything match up, then give us a call at to speak with a certified credit counselor for a free debut and budget analysis. You can also complete an online application and we’ll be in touch soon!