According to the 2013 Economic Well-Being of U.S. Households report, more than 43% of households in the United States are in debt. And debt doesn’t just affect your wallet; the stress associated with financial struggles can cause problems with blood pressure, cholesterol, diabetes, obesity and more.
The best way to combat debt? Creating and sticking to a budget. It may be a tedious task, but budgeting is the only practical way to reign in unnecessary spending, make sure that your money is going to the right places, and help you set funds aside for long-term plans and projects.
Need help getting started? Check out these tips below!
1. Know What You’re Spending
Figuring out your expenses means making an effort to stay organized and keep track of your bank statements, receipts and financial files. Because not all expenses, like insurance payments, are monthly, you’ll get the best idea of your financial situation if you calculate your average expenses for the year and then determine the monthly average.
Remember, being thorough when you list your expenses is an important step when creating a realistic budget. Surprises and unexpected bills will always pop up. To account for these expenses, add an extra 10% to 15% to what you’ve calculated.
Don’t forget that keeping track of your expenses isn’t just a one-time exercise to determine your spending habits – it’s a lifelong practice that will help you stay accountable for what you’re spending. Having to keep track of expenses may cause you to think twice before splurging, and it’s especially satisfying and motivating to record when you’ve met a savings goal.
2. Determine Your Income
It’s not just your salary that you’ll need to consider. When figuring out your annual income, include any extra funds that come your way throughout the year like alimony, child support, interest, dividends and rental income. Like your expenses, your income will change from year-to-year, so don’t forget to factor in raises and other extra funds that come in over the course of a year!
3. Remember the goal is to Save, Save, Save!
Income – Expenses = Your Savings. It seems like a simple enough idea, but for many of us seeing a little extra green in our bank account only tempts us to spend. Your savings are an important tool to help you achieve your short and long term goals. They will help you make important purchases like a new car or a new home , and will help you prepare for things with a longer timeline, like retirement. Having adequate savings also provides peace of mind in the event of an unexpected emergency like a job loss or illness.
Think carefully before dipping into your savings. If there’s anything special outside of your normal expenses that you really want, a helpful trick is to commit to saving two times more than the price of the item. By the time you have saved enough, you may decide that you don’t want the item after all. At the very least, you will have added to your savings account.
4. Use Credit Cards Wisely
For some people, using credit cards makes it too easy to spend more money than they originally intended. According to EconomyWatch.com, people tend to spend 12-18% more when they pay with a credit card instead of cash. When paying with a credit card, consider your purchases carefully and strive to stay on budget.
5. Be Realistic
Setting unrealistic goals will only cause you to get frustrated and give up on saving. It’s best to think of budgeting as more of a lifestyle than a short term way to reach your goals.
Occasionally treating yourself is a great way to stay on track. By rewarding your efforts, you will not feel like you are being deprived.