Budgeting is the first step towards taking control of your money, since it gives you an unbiased view of how much you’re bringing in and how much you’re spending. Relying on your “gut feeling” can be disastrous because it leaves so much opportunity for a myriad of small expenses to fall through the cracks, although they do add on at the end of the month. Add a debt management plan to your budget and you’re pretty much building your money management system on rock-solid ground and setting yourself up for a decidedly brighter financial future where you’re in control of your money and not the other way around. Put together, budgeting and debt management are the pillars of financial security and independence. Used correctly, they will show you that it’s entirely feasible to reduce (and ultimately eliminate) debt AND save for your future financial security at the same time.
Think about it, budgeting without including debt management in the process is like getting in your car and taking the highway without knowing where you’re going. You’ll end up SOMEWHERE, that’s for sure, but not necessarily where you’d like to. As an added bonus, budgeting that includes debt management provides a strong defense against credit card debt abuse (or the abuse of any for of debt for that matter).
It’s true that in many cases, unexpected events and/or expenses contribute a big proportion in creating debt that ultimately spirals out of control. That’s particularly true of medical expenses. Your budgeting plan has to be created so that in protects you to some extent against these events: setting up an emergency savings fund of at least $1,000, raising the deductibles on your insurance policies to the aforementioned $1,000, curbing your unnecessary expenses, saving FIRST and spending after, maxing out your 401k and IRA contributions, and so on.
This is where most people’s budgets fail, because their budgets are geared towards tracking the day-to-day as opposed to being a part of a bigger financial picture. Even the best intentions are no match for incomplete information. Without a complete plan, it’s easy to revert back to your old practices of overspending, being careless about money and getting deeper into debt.
Never underestimate how much of a drag being in debt is on your financial well-being. Simply put, if you can’t make ends meet without tapping into your credit, then you’re living beyond your means and will never be financially independent if you don’t right the ship. Instead of investing in the credit card companies, start investing in yourself. In today’s materialistic world, where everything moves in a whirlwind, it’s easy to get caught up and not realize you’re headed for financial disaster until it’s absolutely too late, because you lost sight of what’s important and feel victim of trying to live up to everyone else’s expectations.
First of all, you need to create a budgeting plan that caters to your individual needs, or to your family’s need if you have one. Define what your needs are (don’t get them confused with your wants), set your own goals (not the ones dictated by your parents or your neighbors), and set everything in motion so that you can accomplish them. Because each person is unique, so is every plan. Of course, if you have a family, make sure that your spouse is also involved in drafting the plan and making it a reality. Depending on your children’s ages, you might also involve them and turn the budget into a total family affair. This will help your children get an early grasp on financial matters and understand this fundamental principle of financial success: the key to financial freedom is to live within your means.
The main challenge is going to be scaling down after having thrown caution to the wind for so long. But it can be done. Things that seem really indispensable right now will look like foolish expenses once you’re starting to prioritize your financial goals. Once you have mastered the art of curbing your expenses, and once you see how much money you can actually dedicate to your emergency fund, paying down your debt, and investing, you’ll be eager to find even more ways to squeeze extra dollars out of your expenses.
A solid budget is indispensable if you want to control your money and your debt. Similarly, a good debt management plan is necessary to make your budgeting picture complete and make it more likely to succeed. The two go hand in hand and it’s that much harder to be successful at one while ignoring the other. They work best as a pair.