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.
A good budget provides a framework for financial stability. All your monthly expenses need to fit somewhere in that blueprint so you can avoid taking on high-interest credit card debt.
Here’s a quick look at how a balanced budget works.
The foundation of your budget is your income, and it needs to support everything you spend. Add up all your sources of monthly income and be realistic. Only count what you make and not what you hope to make.
Next, you need to house all your expenses on one of three levels: Fixed, Flexible, and Discretionary.
The first level is where all your fixed costs live. That’s any need that costs the same amount each month.
The next level is where all your needs with no fixed costs live. These are things you can’t live without, but the cost may vary.
Credit card debts live in one of two places. If your balances are low and you pay them off each month they will live in your flexible expenses. If the balances are large make big, fixed payments every month until it’s paid off in full.
The final level is where your wants live. Things that aren’t necessary but make life fun. Discretionary expenses are where the fun and frills live. If you need to scale back, this is the place to start.
Savings are often treated as a discretionary expense. But they really should be moved in with your fixed expenses. Make it a set cost that you pay yourself every month.
Every budget should be maintained to stand up over time. Periodically, compare your actual spending to what you planned. This ensures that your financial house can hold all your monthly expenses, so credit cards don’t have to cover the rest.
If you see you’re consistently overspending, go back to your blueprint and rework it. You may need to cut something to make room. Eliminating debt or adding income will give you a chance to add, cut expenses back in when you have room.
Visit ConsolidatedCredit.org for more budget and money management advice.
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:
- Income increases from career advancement
- Changes in income due to job transitions or unemployment
- When you buy a new car or a new home
- When you add another child
- If adult children or parents move in with you
- Anytime you take out a new loan or credit line
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 (844) 276-1544 to speak with a certified credit counselor for a free debt and budget analysis. You can also complete an online application and we’ll be in touch soon!