This year has made demands on the finances of almost everyone. With depleted resources, we must all have a plan to rebuild and stabilize our finances. With commitment and time, you can manage your money even when there is not much of it.
The first and most important task is to develop a budget. The task, although not much fun, is to assess your income and expenses. This will help you develop a reasonable and realistic budget. Create categories and sort your expenses over the past few months. Separate them into needs and wants and thereby prioritize your spending and preferences. Do the same for your debts.
Take note of your spending pattern and identify items which are “leaks” to plug. Make these part of your future budget, perhaps to avoid. Essentially you are finding ways to reduce your expenses.
The first place to start is the “wants” category because there lies the most flexibility. Remember it is important to allow yourself room for fun in your budget. Without some slack, you the risk of frustration and quitting. But remember the key when building your savings is to downsize your lifestyle. If you cannot pay your bills, closely check what might be luxuries.
The “needs” category follows the “wants” category. There may be more savings here than you expect. Check every bill to see whether there is a less expensive choice or program. Saving is hard, indeed a struggle. Frugality is your friend. It means getting the most, not being cheap. Grocery shop carefully, do some projects yourself, renegotiate your rent. The point is to adopt a frugal lifestyle and look for opportunities to trim costs.
One important question is whether to focus on debt or savings first. It depends on your situation, but you should build an emergency fund before reducing debt. Granted that banks accounts pay little and credit card debt is huge. This is a tough choice. Unexpected setbacks are inevitable. Be prepared for them, otherwise they can devastate your budget and your finances. While it might take some time to build an emergency fund, it will allow you to stick to your budget if a financial setback arises.
On the issue of debt, do not jeopardize your finances by ignoring your debt. Late fees and interest can turn a small debt into an overwhelming one. Your debt should be a priority.
You need a debt repayment plan. First pick a method. Here are 3 ideas: 1) Pay your smallest debts first. Seeing your debts paid down is satisfying and promotes continuity; 2) Pay debts with the highest interest rates first. This method can save thousands of dollars over the life of your debts; 3) Reduce your credit card interest rate. Just ask the credit card company for a lower rate. It works, not always, but try. And do not fall for the voicemail offers. Speak to a real person!
If you are behind, and recently that includes many people, request extensions or payment plans. These requests are often granted. Freeing some money means you have some slack for other parts of your budget. Do not hesitate to talk to your landlord.
A game of catch-up might derail you from your other financial goals. But the most important objective is to keep your debts organized and come up with a plan to handle each one.
Write down your plan because it carries more weight for completion then. Account for everything.
Do these steps conscientiously:
- Break up goals into smaller milestones to make them easier to achieve
- List debts in the order that you want to repay them
- List expected sources of income
- Pick a debt payoff method
- Assign an amount toward each debt.
- Determine how long it will take to pay off each one
Avoid these mistakes:
- Be realistic and do not underestimate. Don’t set yourself up for failure.
- Allow some money for fun. An extra little bit of money can prevent you from feeling deprived, which can lead to overspending. Blowing the budget or losing commitment is not really a choice.
Part of managing money is increasing your income. For example, you might be able to:
Consider a different job
Sell stuff you do not want
In essence, difficult financial situations are about being resourceful. Look for opportunities to save or earn more. Seize those opportunities. Be alert for opportunities because you will be poised to take advantage when they appear.