Budgeting Made Easy Simple Step-by-Step Instructions to Help You Build an Accurate Household Budget
Why Budget? Staying in control of your finances is tough, but it s even harder when you try to keep everything straight in your head without a solid monthly budget in place. So you know having a budget would help improve your finances, but it seems like a lot of work and you don t know where to start. Consolidated Credit Solutions is here to help! This guide will help you: Create, implement, and maintain a successful household budget Build strategies to help you save money and avoid building up too much debt. What are the elements of a good budget? Your budget should be tailored to your needs and your unique financial situation, but any good budget should include the following: A breakdown of total net (takehome) income An overview of fixed expenses, such as mortgage payments and insurance An outline of estimated flexible/ discretionary monthly expenses, with desired spending goals An breakdown of credit card debts, including current APR, balance owed, and payment schedule 1
How Can I Tell If I Have Too Much Debt? Holding too much personal debt is a serious financial issue faced by many Americans. It s usually caused by unsecured debts, such as credit cards, because these monthly payments increase as your credit card balance increases. If you spend too much on credit, your monthly credit card bills can exceed what you can afford. Avoiding these problems means keeping a close eye on your debtto-income ratio. Using this ratio allows you to have an easy metric of your debts and whether or not they re manageable given your current income. Determining Your Debt-to-Income Ratio This ratio can be determined by dividing your total monthly debt obligations by your total net monthly income. (You can use yearly figures, but monthly is often easier to determine.) For a healthy financial outlook you want your ratio to be less than 36% A ratio of 50% or higher indicates severe financial distress If your ratio falls between those two numbers, you need to monitor your ratio closely and consider implementing a debt reduction strategy. If you want some help crunching the numbers, you can use our debt-to-income ratio calculator to take care of the math for you. Using a Budget to Avoid Debt Problems If debt problems are usually caused by too much credit card debt, then the remedy is implementing a budget strategy that pays off this 2
debt as quickly as possible before you get in financial trouble! Instead of paying only what your credit card bill requires each month, try implementing a fixed payment strategy. Use your budget to decide what fixed amount you can pay on each credit card and pay that amount regardless of how low the minimum amount required drops. You will pay off those debts faster and pay less in interest. If you don t have a lot of extra money, you should at least commit to fixing your first minimum monthly payment as the amount you will pay each month. Since you can at least afford paying this amount one month, it should be easier to fix this as the amount you pay every time. Example: Credit card balance: $5,000 APR: 15% Payment schedule calculated at 2% of current balance First minimum monthly payment: $100 Paying only the minimum amount required each month: Debt paid off in: 331 months Total interest paid: $7,517.52 Total amount paid: $12,517.52 3
Paying a fixed payment of $100 each month: Debt paid off in: 79 months Total interest paid: $2,895.60 Total amount paid: $7,895.60 Paying just the minimum amount required will keep you in debt over 27 years even if you don t buy anything else on credit in that time! Simply committing to fixing your first payment gets your debt paid off in-full saves you 21 years of payments and saves you almost $5,000 in interest. How Much Should You Be Saving? According to financial polls, roughly 1 in 4 people find it difficult to determine exactly how much money they should be saving. As a result, many people treat savings as a whatever you have leftover endeavor, which typically means nothing gets saved. Experts agree you should save about 10% - 15% of your net income each month. Using a Budget to Build Savings The polls also indicate 1 in 3 people find it hard to maintain discipline when it comes to building savings. Even with a budget in place, you may find yourself spending the money you have leftover each month, leaving nothing for savings. To gain discipline in building savings, start treating your savings as an expense in your budget. 1. As you create your budget, decide how much you can put 4
2. 3. into savings each month. Set this amount as a line item in your budget just like your utility bills or credit card payments. If possible, set up your bank account to deduct this money automatically to a separate savings account. Where Should Savings Go? Once you determine how much you can save, the next step is to determine where it should go. Savings can include everything from the money in your standard savings account to retirement and long-term investments. Here s a breakdown of what financial experts agree you should have in savings: You should have at least $1,000 in emergency money in an easily accessible checking or savings account to cover emergencies and unforeseen expenses Given today's economy, it is recommended you have at least 6 months of expenses in a savings account, in case you get hit by unemployment or can t work You will need at least 75% of your current income for each year after you retire Once you have your savings built up and any retirement contributions set, you can start investing and/or saving up for specific big-ticket expenses: Save up to put a larger down payment on your next home to get better terms on your mortgage Save enough to purchase your next car without needing a line of 5
credit Save to pay for your next vacation in cash Save money to purchase long-term investments, such as CDs or treasuries Income Worksheet Use this worksheet to get started on your budget by determining your total monthly income. Income Source Weekly / Bi-Weekly Income Monthly Income Your wages $ $ Partner s wages $ $ Additional wages $ $ Child support $ $ Alimony $ $ Social security $ $ benefits Veteran s benefits $ $ Disability payments $ $ Structured settlement $ $ payments Annuity payments $ $ TOTAL INCOME $ $ 6
Fixed Expense Worksheet These expenses are fixed payments you make each month typically for installment debts, such as your mortgage or car loan and insurance. Expense Mortgage / rent $ Real estate taxes $ Homeowner s insurance $ HOA fees $ Auto loan / lease $ Car insurance $ Alimony / child support $ Medical insurance $ Other $ Other $ Other $ Other $ TOTAL FIXED EXPENSES $ Monthly Payment 7 Flexible Expense Worksheet Flexible expenses are necessary expenses but often vary in how much you pay each month. These include things like your utility bills as well as necessary monthly expenses. Often you can do things to save money with some of these expenses, such as clipping coupons for groceries or improving the energy efficiency of your home to cut energy costs.
Expense Current Monthly Payment Telephone bill $ $ Power bill (electric, $ $ gas, oil) Cable / satellite bill $ $ Water bills $ $ Gas (automotive) $ $ Tolls / transportation $ $ fees Groceries / household $ $ Clothing $ $ Dry cleaning / laundry $ $ Day care $ $ Tuition / school supplies $ $ Pets $ $ Savings contributions $ $ TOTAL FLEXIBLE EXPENSES $ $ Spending Goal/ Limit Discretionary Expense Worksheet A discretionary expense is anything you regularly spend money on each month, but it doesn t count as a necessity. This is the category of expenses you should look to first when you want to free up more money in your monthly budget. 8
Include all of your expenses, so if you do things like get coffee every morning or go out to your favorite sports bar to watch the game, make sure to include these under other and define the line item expense as needed for your situation. Expense Current Monthly Payment Dining out $ $ Recreation activities $ $ Movies / theater $ $ Concerts / sporting $ $ events Magazine / newspaper $ $ Salon visits $ $ Fitness / gym membership $ $ Hobbies $ $ Clubs / team fees $ $ Fundraisers / charity / $ $ tithes TOTAL DISCRETION- ARY EXPENSES $ $ Spending Goal/ Limit 9
Credit Card Debt Worksheet This worksheet allows you to get an overview of your unsecured debts. Beyond your credit cards, these may also include medical bills and unsecured payday loans. Creditor Name APR Balance Owed Current Monthly Payment TOTAL FIXED MONTHLY CREDIT CARD PAYMENT $ Desired Fixed Monthly Payment 10
Budget Overview Worksheet This final chart allows you to bring everything together so you can make sure you re living within your means. Simply subtract all of the monthly expenses from your monthly income. Category Total Total monthly income $ Total fixed expenses $ Total flexible expenses $ Total discretionary expenses $ Total monthly credit card payments $ BUDGET TOTAL $ If you re over budget, identify places where you can cut back, reduce the spending goal for each expense and recalculate your totals. If you have money left over, you can add it to savings or simply let it stay in your budget for those incidental expenses that pop up every once in a while but aren t regular monthly budget items. Budget Analyzer Use the handy chart on the next page to keep track of your progress make sure your budget works for your 11
Expense Budgeted Actual Mortgage / rent $ $ Real estate taxes $ $ Homeowner s insurance $ $ HOA fees $ $ Auto loan / lease $ $ Car insurance $ $ Alimony / child support $ $ Telephone bill $ $ Power bill $ $ Cable / satellite bill $ $ Water bills $ $ Gas (automotive) $ $ Tolls / transportation fees $ $ Groceries / household $ $ Clothing $ $ Dry cleaning / laundry $ $ Day care $ $ Tuition / school supplies $ $ Pets $ $ Savings contributions $ $ Dining out $ $ Recreation activities $ $ Movies / theater $ $ Concerts / sporting events $ $ Magazine / newspaper $ $ Fitness / gym membership $ $ Hobbies $ $ Clubs / team fees $ $ Fundraisers / charity / tithes $ $ Credit card debt payments $ $ TOTAL $ $ 12