While personal finance is a wide-ranging topic, one central focus determines whether all the other areas can be managed well: budgeting. Financial budgeting is not what you think it is. Most people think they should manage expenses to fit their budget. If there’s extra at the end of the month, you will add a little to your savings account, and if there’s none, then no savings. No, that’s not taking control of your finances.
Are You The Servant Or The Master Of Your Debt?
Without a financial budget, you’re likely to spend your money frivolously and recklessly, and before you know it, you’re in a hole that is hard to climb out. If you take control of your money, then you are the Master, but if money controls you, then you are a very good servant.
You have good and bad debt. Good debt have payment terms that are affordable and not a burden on your monthly cash flows and used for something that you really need. Bad debt is exactly the opposite. You typically have bad debt for those items that are frivolous and have a negative impact on your financial responsibilities.
The Most Effective Way To Budget
The wisest most effective way to financial freedom is by committing to saving a fixed amount of money every month. Put this aside first, and whatever you have leftover is for spending. Under this approach, saving money isn’t a contingent activity but a regular and consistent habit.
First, you need to minimize expenses. It’s important to clearly distinguish between needs and wants. You may find this basic common sense, but many have fallen financially because of the inability to understand and distinguish what they really need versus a want.
If you feel you need to buy something, simply ask yourself “Do I really need this?” Even with regular grocery shopping, you can plan your meals and write out a shopping list to and stick to it. It boils down to resisting temptation.
Another must is record keeping. Simply recording your expenses will help you clarify where your money is going, and you’ll see what you don’t need. Cable television, dining out, Starbucks every day, or a bad Amazon habit can all drain your disposable income. Recording your expenses will help you cut down and put that extra money into savings.
Paying Off Bad Debt
You won’t be able to meet your financial needs and goals if you’re drowning in bad debt. So, one of the most urgent steps to take is to prepare a realistic budget for paying off these debts, and it has to be a priority.
Pay yourself first, by placing some funds in your savings. Then after your actual needs like food, clothing, utilities and shelter, everything else should go to paying off debts. Many people think that ignoring or hiding from their creditors is the best solution, but it only forces creditors to apply interest and penalties on top of the initial amount, and submit to the credit bureau. It’s a domino effect which places you deeper in that financial hole.
Take a proactive step to paying off your debts. When you are debt free, only then do you really have financial freedom to spend what you want on all the items you want.