Personal debt in the United States is skyrocketing. In the last quarter of 2018, data from the Federal Reserve revealed that collective personal debt exceeded $4 trillion in America for the first time ever, and had reached over $4.5 trillion by June 2022. One of the recommended ways to pay off debt is to make a financial plan and stick to it.
“In two decades as a finance professional, I can’t tell you how many people tell me, ‘I know debt is a huge problem in this country, but I thought I could handle it,'” says Howard Dvorkin , CPA and chairman of Debt.com, in a 2019 press release after the company released its annual budgeting survey.
“It’s human nature to expect the best and not plan for the worst, so many otherwise intelligent Americans refuse to budget – because they don’t think they need to. Then a disease or a serious accident prevents them from working. Or they simply get laid off. Or they get divorced,” he says. “Or a natural disaster strikes. That’s when all those years of budgeting help you weather the storm.”
Key points to remember
- Developing and maintaining a budget plan can help pave the way for a healthy financial future.
- Perfection is definitely the enemy of good – don’t feel like you have to track every penny if it’s overwhelming.
- Keeping track of what you plan to spend versus what you actually spend each month can help you adjust your budget.
- Budgeting apps or software can be useful tools for tracking expenses.
There “budgetis notorious for cringing, crying, and burying your head in the sand, but budget challenges don’t have to stop you from getting the job done. Budgets are just a set of guidelines to help you manage your money. Once you’ve set up your system, budgeting isn’t even a big job. If yours doesn’t work for you, delete it and start over. But don’t let that stop you before you start with challenges that you can easily overcome.
Challenge #1: The all-or-nothing mentality
Many people are put off by budgeting because most advice on creating a budget involves tracking every penny spent for three months. That’s a lot of savings in receipts and tracking, especially if you’re not using an automatic system. The purpose of a budget is to get a picture of your spending and plan your financial goals – in other words, it’s a tool for you and you alone – and if tracking every penny is an obstacle to help you get started, cut yourself a little slack.
Having a general idea of your income and major expenses is a good first step towards creating a budget. Current expense categories include:
- Lease
- Utilities
- Phone/Internet
- Transportation
- Insurance
- Races
- Car payments
- child care
- Loans or debts
- Clothes
- Entertainment
- Dine out
- Travel
- Charity
- Savings
If you’re roughly counting what you spend on each of these categories (or what you’d like to spend) – and it’s less than your income – then it’s good to track your broad spending categories and skip lunch. occasional or impulse purchase. . If you find that you are spending too much, you need to re-evaluate and set a stricter budget.
Some experts suggest against using credit cards when you’re on a budget unless you’re able to pay off the full balance each month.
Challenge #2: Labor Intensive Tracking
As mentioned above, common budgeting advice requires you to track all of your income and expenses for several months. You can do this on paper or on a spreadsheet, but there are easier ways. A variety of applications and there are computer programs that will track your expenses, categorize them, help you create a budget, note progress towards your financial goals.
In different ways, these apps monitor your bank accounts, credit card transactions, and even investments and retirement planning. Some also allow you to set spending goals.
Challenge #3: Pay in cash
People who use cash instead of credit have been proven to spend less overall. The big hurdle is that spending money makes it very difficult to stick to a tight budget because to track your expenses you have to manually tally receipts. There are several ways to stick to a budget while avoiding credit cards.
One method is known as the “envelope” method. You take your pocket money out of the bank at the beginning of the month and divide it into envelopes. When the grocery envelope is empty, that’s it for the month (although you can always borrow the other envelopes for emergencies). A more wallet-friendly alternative to carrying multiple envelopes is to piece together paperclip bills and attach a sticky note indicating what the money is for. Obviously, some monthly bills will be paid directly from your bank account – or by check, if you always do – for example, rent, car payments, credit cards and utilities.
A less complicated version of this method requires designating a specific cash amount for variable expenses and miscellaneous purchases and putting it in one place. Instead of tracking every cup of coffee or every dinner out, use your cash to guide your overall spending. The fund can be designed for the period that suits you best: weekly, bi-weekly or monthly. Just coordinate it with the big monthly bills. This second approach could also work with a debit card if you carefully track what you spend.
The essential
Budgeting can seem daunting, labor intensive and difficult, especially for those who use cash. The most important thing to remember is that this is a tool for you, and if you mess up one month, you can just try again the next month. And don’t be afraid to change your budget if that doesn’t work. Use the tips above and you should be well on your way to finding a financial plan that fits your lifestyle.