How to Make a Better Budget

Budgeting Together

Having a budget is essential in order to better manage your money and reach your financial goals, such as paying off debt or saving to buy a home. A budget can help you set spending limits and feel more in control of your money. So, we’ll be going over how to create your own personal budget.

Budgeting First Step: Track Your Income and Expenses

The first step of budgeting is finding out your net monthly income. To calculate how much money you will be taking home, you will need to deduct taxes, insurance costs, and business expenses from your monthly salary. This will leave you with an exact amount that you will be receiving at the end of each month, known as your net monthly income.

No matter how much you earn, it is still possible to end up with no money if you don’t know how to spend it properly. So, the next step is the figure out how to allocate that amount by tracking your expenses and seeing exactly where your money is going. Start by dividing your expenses into two categories, fixed and variable expenses. Fixed expenses are recurring monthly payments such as rent and phone bills which typically remain the same each month. Variable expenses tend to vary based on consumption, such as groceries, gas, entertainment, and eating out.

Step 2: Find Savings in Your Budget (Yes, You Can)

To determine areas where you can save more money, review some of your credit card and bank statements from the past few months. If your net income is greater than your total expenses, then you can start putting aside the extra money for your retirement or emergency fund. However, if your expenses exceed your net income, then you must look for ways to cut down on expenses as soon as possible. This involves going over your variable expenses and identifying unnecessary expenses such as subscriptions that you no longer need or eating out too often. Variable expenses are typically easier to cut down on in order to stick to a strict budget., but you may even need to look to adjust your fixed expenses in case you are still going over your budget.

Step 3: Make Plans for Savings and Paying Down Debt

While budgeting differs depending on each person’s situation, the 50/30/20 budget is a popular choice that works in most circumstances. Under this strategy, your net income will be split 50% for needs, 30% for wants, and 20% for savings or paying off debt. It is absolutely critical that you commit to paying down debt and then setting aside savings. The entire point of budgeting is to help you generate “future-forward” momentum in your financial life. The only way to do that is to free yourself from debt that may be choking your ability to save for the future. The next step? Save for the future.

This is why budgeting is key. Looking at the reality of the numbers that shape your life allows you to get clear about what is happening in your financial life. Think about it this way: what are your big life goals? Retiring? Traveling? Being financially secure and independent? You can’t do any of those things if you find yourself having to shovel part of your money each month into a credit-card debt hole. So make a plan to get out of that hole, today. (Consider debt consolidation loans as an easy option: you can pay off all your cards and pay a single monthly bill that charges you less interest than your cards.)

Budgeting Is Never Actually “Done” — And That’s Good

Also, your initial budget isn’t set in stone, and it must be adjusted regularly as your financial situation changes. When you get out of debt, you revise your budget to set aside an emergency fund. When the emergency fund is complete — 3 to 6 months’ living expenses — then you can start saving for the good stuff: retirement, investing, more. Keep making plans and keep revising your budget — and build yourself the stable financial future you deserve.

With a Recession on the Horizon, the Time to Pay Down Debt is Now

The time to pay down debt is now

The nearly double-digit inflation that ripped through the American economy in spring and summer of 2022 left most financial experts asking a key question: Is a recession next? That’s because the Fed (aka Federal Reserve System, or America’s central bank), has hiked interest rates three times since the beginning of the year in response to inflation and in an attempt to slow down the economy. And financial experts are predicting another rate hike this month

Paying down debt is always a number-one piece of advice to build financial stability, but when the economy is unstable and a recession is possible, it becomes critical to dump debt. 

Why Pay Down Debt to Prepare for a Recession? 

Recessions are defined by slow economic growth and greater uncertainty. This slowdown shows up in several ways on a macro level, like decreased GDP (Gross Domestic Product, i.e. how much America is producing and selling). But for people (as opposed to economies), recession usually leads to 3 telltale things: 

  • Cost of living goes up
  • Wages are cut and layoffs become more common
  • A decrease in consumer spending caused by (1) and (2) above, which further deepens the economic slowdown

“Recessions cause consumers to almost instinctively protect their financial position, by spending less and looking for ways to protect their income” says Jessica Owens, financial advisor at Funding Hawk. “Both are smart moves. But if you are carrying significant credit card debt, now is the time to make aggressive moves to resolve that debt.”

Owens details the reasons:

You want to free up your credit as protection

A less-secure job market means you need to put yourself in a position to be resilient, should you experience job loss or wage cuts. And part of that resilience comes from having a solid emergency fund in place or ensuring there’s wiggle room on your credit cards.

You want to avoid increasing interest rates

With interest rates likely going to continue to rise, carrying a lot of credit card debt is likely to get even more expensive than it already is. An additional percentage point of two added to already sky-high interest rates can push your balances into the danger zone, and possibly max you out. 

This is why debt consolidation loans are a good option at this moment, before a recession strikes. If you have sufficient household income, you can qualify for a loan that is likely a much lower rate than your high-interest credit cards. But you’ll want to roll all your credit card debt into a consolidation loan soon. After a recession, interest rates are likely to continue to climb.

You may not be able to access loans as economy contracts

Once the economy is in a full-blown recession, capital tends to freeze and stay in place and accessing new debt – i.e new loans or new credit cards — becomes much more difficult and burdensome. In other words, lenders become more cautious in the same way consumers become more cautious. 

Debt Consolidation Loans are a Good Option —If You Act Now

With all the above looming economic changes in the wings, now is the time to make a definitive plan to manage any credit card debt you are carrying. And transferring that debt to a debt consolidation loan is a relatively straightforward manner for doing just that if you don’t have the means to pay debt down right now. 

“Debt consolidation loans allow you to basically pay off all of your high-interest credit card debt with a single loan,” says Owens from Funding Hawk, which specializes in debt consolidation loans. “And many people qualify for a lower interest rate than what they are currently paying,” she says.

Both your monthly income and your credit rating will both play a role in determining what kind of interest rate you can get for a debt consolidation loan. And your total debt load also plays a part. You are able to do some online research to see what your new monthly payments might be with a debt consolidation loan, using online calculators

But the surest way to find out if a debt consolidation loan is right for you is to speak with a consultant. The consultant will ask you a few questions and be able to provide an analysis of your situation right away. The most important step is to take the first step, before a recession further dampens consumers’ ability to manage their finances.