As you’ve seen in the previous sections of the Debt Elimination series, you must have a plan to get out of the credit card habit. Changes do not just happen, actions must be taken to get the desired results.
If you haven’t already read the following posts, you may want to take a few minutes to catch up on this topic. These articles provide the first steps required to begin your debt free journey.
- Newton’s First Law of Debt Reduction
- How-To figure out if your in Debt
- How-To get out of Debt, Stop Spending Part 1
- How-To get out of Debt, Stop Spending Part 2
- Track your spending
In this post we’ll talk about the benefits of writing and using a budget.
- On Paper, On Purpose
- Less Stress
- A Road Map
On Paper On Purpose
The phrase on paper on purpose is my favorite Dave Ramsey line. On paper on purpose simply means if something is important to complete, you’d need to write it down. Our brains can fool us into thinking things are fine, even though our financial world is collapsing. While living in denial, our brains just keep reminding us everything is ok. The first step in any recovery program is usually the most difficult, admitting you have a problem. A written budget will show you if you in fact have a problem. If you do, then you need to fix it. If you don’t, good for you but you still need a solid financial plan. Using a budget worksheet is a great way to start capturing current expenses and to begin customizing a budget that will destroy your debt. How to budget is a great resource to check out for setting a budget.
When you are dealing with money, you can’t rely on your brain to always provide sound advice. Your emotions come into play and they can derail any good money habits you have been working to adopt. Using a written budget to list the ways you are allowed to spend your money will take away the emotions. Having a written budget will also place you and your spouse/partner on an equal playing field. The two of you will know where, when, and how your money is being spent. I like to refer to my budget as our normalizer. It allows my wife and I to completely understand the ins and outs of our money so neither person has an inflated view of our finances. It was the single most important step that we’ve taken to understand our finances and how each of us react to them.
Having to review your finances can drive home the fact that you need to make smart decisions with your money. Having the discipline to follow the budget is the hard part. People do not like to be controlled, and living on a budgets make many people feel this way. But once you see how a budget can help you save money, you’ll love the concept.
When drafting a budget you need to take into account all the possible ways money runs out of your fingers. Weekly groceries, utility bills, credit card bills, mortgage payments, the kids birthday party, the house insurance, and every other expense you can think of. Always remember that even though an expense doesn’t accrue every week or month, you still need to account for it. The best examples of these would be Christmas, or the property taxes you pay. You need to set up a sinking fund to account for these expense so you have the money when it’s required.
Another powerful benefit from creating and using a budget is it’s ability to stop your excuses. You can no longer say that you didn’t know the checking account balance was low. You can no longing stop at a fast food joint for a burger and not account for the spending. You can no longer over spend on clothing when you know you only have $100 to spend. Using a budget sets your limits and holds you to them. You have to account for all your spending to the budget and to your spouse, both of which are great motivators.
Have you ever lost sleep over money issues? Accounting for all expenses in a budget will provide you piece of mind. Instead of having a disorganized approach to money where you can miss a payment, a budget will keep you on the straight and narrow. Imagine having a tool that will keep all of your finances in one spot, that’s a budget. No more stressing whether you have the money at the end of the month to write a check to pay the gas bill. You’ve already written the check and balanced your accounts because you have your finances under control. After working and living on a budget for a month or two you’ll see a huge reduction in stress, then you’ll wonder how you lasted so long without one.
A Road Map
The biggest advantage of a budget is its ability to help guide you to your goals. Learning to live beneath your means while not adding to any debts will produce a surplus of money. The budget is the tool that you use to grow the surplus. As you continue to understand your budget and how the money flows into and out of your life, you’ll be able to make better decisions. You can use the surplus to build an emergency fund, to save for retirement, to pay off debt, and any number of other wealth building items.
The surplus is completely controlled by you and you choose how to use it every month. If you are saving for a down payment on a house and you need $20,000 in the next year, the budget is the place to start. Take the current surplus of $1,000 per month to start the calculation. $1,000 times 12 months will only get you $12,000. You need to review the budget so see what else can be eliminated to reach your goal. You would need an extra $667 per month to reach the $20,000 goal. Cutting back $100 a month on groceries, $200 on entertainment, $100 on heating/air conditioning, $67 on gas, $50 on cable channels, $100 on cloths, and $50 on blow money will get you there. If that is too much to cut, then you need to extend the time frame or get more income. Using a budget like this is a great way to plan for the future. Of course surprises are going to come up, but it is the best way to navigate to your goals.