This is article two of Part One of the “Conquering Debt Series.” Read article one of Part One here.
When you have debt, there is always a fear of falling behind. In some cases, debt becomes so overwhelming and prominent that financial troubles become a terrifying reality.
When you hit this point, there are three crucial reasons why you should set up a budget or spending plan as soon as you recognize that you will be facing hard times.
1) A budget can help you determine how much you have to spend on necessities and how much you have left over to pay the rest of the bills. This will help you make decisions and give you a range of choices on how to deal with your debts.
2) A budget helps you see how you are spending your money. You can pinpoint spending problems and identify spending habits.
3) When dealing with creditors, the option for payment plans and modifications might come up. Sometimes, these options are the only thing standing in the way of losing your home or car. The only way to have a clear understanding of what you can and cannot offer your creditors depends on your budget. If your budget is created, you will already know what you can afford to offer your creditors, and you will already have the information you need to make the process much easier.
SETTING UP YOUR BUDGET
Here on TBM, I have written many articles on creating a budget. You can find some of the most popular ones below:
- Our 2017 Budget Binder (A Plan for Every Dollar)
- Have Irregular Income? Here's How to Budget For It
- How to Budget When You Are Behind on Bills
Mostly, a budget is nothing more than a detailed list of your income and expenses. This doesn't have to be more complicated than it sounds. To help you create a budget, I am giving you exclusive access to my Income and Expense Budgeting worksheets and how to use them.
The worksheets include many sources of income and expenses, and it's vital that you don't assume I have thought of everything. Always remember that your budget needs to reflect your own life and experiences which may include things that are not listed.
For a lot of people, these worksheets might seem intimidating if you have never created a working budget before. The most important thing and primary goal is for you to understand how much money you and your family bring in each month and how much you spend. Even if you decide not to use my worksheets, it's important that you write this down in a way that makes sense to you, so you can follow and keep track of it.
I recommend saving the worksheets to your desktop and creating new ones every month. Keep copies of every month so you can go back and compare your income and spending in different months to check if you are making progress over time in cutting expenses and increasing your income.
After creating your income and expenses budgets for the first time, use it for a month, stick to it, and live by it to see if it correctly reflects your actual income and expenses. Sometimes, writing out the numbers is very different than what is happening in real life. Don't be afraid to make changes and adjust things when it's not working out.
Every month, subtract your income from your expenses. Don't be surprised if you find that your expenses are more than your income. This is why you are having financial problems, and the problem needs to be addressed.
HOW TO INCLUDE YOUR SAVINGS & OTHER ASSETS IN YOUR INCOME BUDGET
One of the decisions you will have to make is how to treat your savings and other assets in your budget plan. Maybe you will decide that the best course of action is to draw down money you have been saving for the future and then rebuild your savings plan after your debt and financial problems are resolved.
Unfortunately, there is no easy answer for this decision. I can't tell you what option is best for you because that is a decision you have to make based on your personal life, and ultimately you have to do what's right for you and your family. It would be wrong for me to tell you anything else.
I can't decide for you, but I can tell you what some people do. Some choose to use only a set amount of their savings each month in their monthly budget to meet essential expenses (housing, utilities, etc.). This might be the right decision for you if you have good discipline and if using your savings will make the difference between meeting your essential needs and falling even more behind.
However, proceed with caution. Using your savings as part of your income to meet essential needs does not mean falling into the trap of using your savings to finance an unrealistic lifestyle. Remember, wants are different than needs.
HOW TO BUDGET LUMP SUMS YOU ARE EXPECTING BUT HAVE NOT RECEIVED
Are you expecting a yearly bonus at work? How about an inheritance you are expecting at the end of the year? Many people have money they are expecting in the future, but which is not yet physically in hand. Sometimes the expectation is no more than a possibility, while in other cases it is guaranteed. Some examples might be:
- Money from the sale of property when the sale is not closed yet.
- Retirement funds or worker's compensation funds which are owed to you but are unpaid.
- Money promised by a friend of relative to help you out in tough times.
- Insurance money that has not yet been paid.
- Money or property which has been left to you in the form of an inheritance by a deceased relative or friend but which is still tied up in probate.
- Social Security or other public benefit lump sums.
- Money from a lawsuit which has not yet been heard in court or settled.
Even though you do not physically have the money in hand, it's still possible to include this money in your financial plan. The only thing you need to remember is that you have to be realistic about when the money may come and how much it will be.
Some money is certain to come on a particular date. For example, if your Social Security payments are due to start on a specific date, you can use this knowledge in making your financial plan. You may decide to supplement your income from your savings for a couple of months while you wait for the permanent change to your income to happen. The same goes for a lump sum that is guaranteed. You can plan to use that lump sum in a way that will cure your defaults on urgent debt.
It's always a bad idea to budget for money that is no more than a hope, either in timing or amount. Payments that are too uncertain should probably not be entered into your plans at all.
Also, when preparing your Income Budget, you should carefully evaluate whether you are maximizing your income.Always pay essential debts first. If any money is left, you can decide which nonessential debts, if any, to keep in your expense budget.Click To Tweet
A DETAILED LOOK AT YOUR EXPENSE BUDGET
Your expense budget should include all your expected monthly expenses, including food, housing costs, utilities, clothing, transportation, and medical expenses.
I know it's difficult when you are first starting out with an expense budget to figure out exactly where all of your money is going. Reviewing your checking account statements and your credit card bills will help significantly and may serve as a reminder. I recommend reviewing the last three months of statements to get an accurate picture.
Figuring out the true cost in each category can also be difficult. One expense category, such as food, may consist of your costs at the grocery store and (and if you are like me) a few trips to the convenience store for special needs each week, plus the costs of eating out. If you only look at one part of this category, like just your grocery store costs, you may underestimate your total food expenses.
It's essential that you do your best to estimate the real total. Then, think about ways you can reduce unnecessary food expenses, for example, by regularly taking your lunch to work.
When you are writing down your expenses, make sure to remember payments you are making on previously owed credit card charges. For example, you may have a balance of $3,000 on your Visa card. If you pay $100 each month to try to pay this down, you should list that amount as a credit card expense.
New charges should be listed in the appropriate “expense” category. For example, if you use your Visa card to buy $200 worth of groceries, you should include this expense in your current food category.
A crucial point I want to make is that you should generally NOT include credit card and other unsecured debts in your expense budget unless you can afford to meet all of your obligations. A blunt way of saying this is to stop using your credit cards until you can afford to pay off the balance in full every month. Your obligation should be paying down your debt, and if you are consistently adding more debt to your credit cards, this will make your situation even harder.
If you do not have enough income in your budget to pay all of your bills, make sure you read this article that discusses the best ways to make choices among various debts. Credit card and other unsecured debts are usually low priorities. Always protect important property by making plans to prevent foreclosure or repossession before you start worrying about your credit rating and your ability to borrow again in the future.
FINE TUNING YOUR BUDGET
Throughout the budgeting process, one of your primary goals should be to get as much money as you can on the income side and spend as little as possible on the expense side. This will ensure that you have more income than expenses every month.
Make sure you are consistently reevaluating your budget to make sure it's up to date with life changes. You should be creating a new expense and income budget every month. Have you found an area of your budget that can be reduced? Make the change in your budget, and adjust if necessary.
Have you discovered unexpected expenses in your budget? Let me know about them in the comments below!