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Many people advocate avoiding debt or credit – and with good reason even though there’s nothing inherently wrong with taking credit. Credit should be considered a tool, and when used correctly, you can build credit worthiness, and claim rewards. When used improperly credit can add stress, cause repossession, or foreclosure.
When credit becomes bad debt, it could have adverse effects on your finances, relationships, and add stress to your life. Interestingly, many people find out the hard way that it is much easier to fall into debt than it is to get out of debt. However, if you take charge of your finances, you’ll be in a much better position to get rid of debt than if you resign yourself to the limiting forces of debt.
Start by knowing how much you take Home
To budget effectively, you’ll need to know exactly how much you take home as monthly income. Many people erroneously plan their budget based on their gross income instead of their net paycheck. However, the fact remains that your actual take-home pay will be lesser than your ‘official’ income because of some deductions on your income. A salary calculator can help you know your actual take home by accounting for taxes, Medicare, and social security among others.
Adopt the 50/30/20 Guideline
A budget helps you to adopt a scale of preference to allocate your income towards your expenses so that you don’t run out of money before the next paycheck arrives. Many people often suggest that you should adopt a Spartan lifestyle when trying to get out of debt by giving up on the simple luxuries of life. However, you can still be frugal, maintain a decent quality of life, and still pay down debt if you plan your budget properly.
The 50/30/20 guideline simply suggests that you should apply 50% of your earnings towards your essential needs. You’ll then apply 30% towards lifestyle expenses and 20% will be applied towards meeting financial responsibilities. I have deliberately used the word ‘guidelines’ and not ‘rule’ because some peculiarities could shift the numbers up/down 5% across the range.
Here’s where you Money should actually go
To budget effectively, write down all of your monthly expenses. Many people find it hard to remember where most of their money goes each month. You may want to take a month to write down all of your expenses – you can go around with a notepad or open an online expense sheet where you write down EVERY expense as soon as you make it
- Group all the known expenses into three broad categories namely; essentials, lifestyle spending, and financial responsibilities.
- Dedicate 50% of your earnings to essentials such as grocery, rent/mortgage, utility bills, transportation, gas, and other basic expenses.
- 20% of your income should go toward meeting your financial goals such as saving for a down payment, paying down debts, making contributions to your retirement nest, and investing.
- 30% of your earnings should be your discretionary income that you spend on non-essential expenses such as Wifi, gym, cable, movies, happy hour, personal care and phone plans among others.
- Depending on your debt burden and the number of dependents you have, you might want to switch up 30% towards financial responsibilities and 20% towards lifestyle spending if you are young and willing to get on the financial fast track.
What budget style have you used to help get out of debt or stay out of debt?