How following a budget can pave the way for your debt-free life!
“NO! Obviously not!” Most likely this will be your reply to the above question. Because who wants a debt-ridden life?
Do you want to stay overwhelmed with your debts?
As a result, you might be planning a lot to make your life debt-free! But before we proceed, let’s have a glance through the perks of a debt-free life which you can enjoy!
You will be able to save more!
When you have taken out a loan, it’s evident that you have to repay it on time! You can see dollars going away from your paycheck within a flash for repaying your debts. And by mid of a month, you might fall short of funds! Usually, this intrigues you to take out another loan, getting yourself trapped into the debt loop!
So, after you get rid of all your debts, you don’t need to pay monthly installments anymore! As a result, you can save more for your bright future!
Your credit report gets improved!
Looking for new credit lines and not paying back your debts on time usually hurt your credit report! But with payment of all your debts, you can see your credit score improving with time.
You might not be able to see a significant rise within a short span of time! But be sure that it will gradually increase with time if you manage your credits properly.
You can lead a stress-free life!
Being debt trapped bounds you to stay under utter pressure of repaying your debts. As a result, you compromise with your happiness! And eventually, you feel disgusted with your life.
A 2017 survey by the American Psychology Association (APA) reveals that about 62% of the people in our country feel that debt has adversely affected their lives! And you would be quite surprised to know that, this financial stress might affect you physically in several ways.
For example, it might lead to cardiovascular diseases, gastrointestinal problems, allergies, diabetes, and many more!
You can have better health!
It might happen that you tend to avoid visiting doctors because of your financial condition. Because a study has revealed that folks having debts are less likely to visit the doctors and other necessary medical check-ups due to inability to afford the costs!
But actually, it’s completely wrong! Rather you need to practice healthy habits for a debt-free life!
After getting debt-free, with the ease of mind, you get good sleep at night! And eventually, it boosts your immunity!
Is planning a budget that important?
Creating a budget is one of the simplest, yet most effective means of managing your finances! But why so?
It helps you to track your dollars and allocate separate funds to each and every category! As a result, the chances of overspending becomes much less. And once you become budget-obsessed, a habit of savings grows inside yourself! Once you learn how to save, it will be easier for you to reach the first milestone of your debt-free life.
So, you might be planning to chalk out your budget soon! You might know that planning a budget is like a hit and trial method. Basically, there is no such generalized budget plan!
Let’s say, one of your friends has suggested you to follow his budget plan which is working perfectly for him! But that budget plan might not work for you! In that case, you have to try with other budget plans!
So before you proceed, why don’t you have a look at the following budget plans?
The 50-30-20 budget
Harvard bankruptcy expert and one of the 100 Most Influential People in the World (conferred by Time magazine) Elizabeth Warren, coined the “50/30/20 rule” for spending and saving with her daughter, Amelia Warren Tyagi.
As the name suggests, you need to divide your net income into three percentages, i.e., 50%, 30%, 20% for your needs, wants, and savings respectively. But how will you differentiate your wants from your needs? Well, you might be able to relate it better with an example below!
Let’s say, you have bought some fruits and vegetables from the market. Fruits and vegetables come under your “needs”. But while coming out, an advertisement of a chocolate cookie appealed you. And eventually, you bought those cookies from the store. This becomes a luxury expense and comes under your “wants”.
So, when you are buying stuff for your basic needs like mobile bills, house rent, mortgages, transportation costs, etc. come under your needs!
Whereas, when you are spending on entertainment, expensive shoes, dining out, etc., those expenses are coming under your wants. Most of us have a tendency to spend lavishly on our wants. But this budget plan can help you to cap your expenses on your wants to 30%!
Most importantly, save the rest 20% for your retirement, emergency fund, etc. so that you don’t need to depend on loan(s) during any exigency!
The traditional budget
Most of us are familiar with this basic idea of planning a budget! You just need to sit down with your pen and a piece of paper. Then note down your income from all sources along with your monthly expenses. Then try to chalk out a realistic budget for yourself to reduce overspending and track your dollars!
Well, you might feel that planning a budget with pen and paper is too old school! In that case, you can take the help of the budget spreadsheets available online. Or you can go for certain online platforms like Mint, You Need a Budget (YNAB), etc. to plan your budget with ease!
If you are not been able to track your expenses, this budget plan can be apt for you! Let’s say, you have allocated five different envelopes for categories like rent, groceries, transportation costs, entertainment, emergency fund.
Firstly, you have to decide how much dollars you want to allocate in each and every category! Based on that, you have to fill those envelopes with cash. Because always remember that envelope budgeting works better when you are using the physical currency.
Still, if you make an online payment for any category, write that on the back of the envelope of the same! It will help you to track down your expenses!
And whenever you run out of funds in an envelope, you have to stop spending in that particular category!
Peter Pyhrr developed this zero-based budget plan in the 1970s! It starts from a zero base from the starting of any budget period. So, before you start analyzing for any period, make sure that it’s set to zero only!
You have to allocate your net income into various sections like groceries, rent, eating out, insurance, clothing, travel funds, etc. But what if you have still got some extra dollars in your hand! In that case, you can add that amount to the next month’s budget or allot it to some other categories like rainy day funds, etc. However, make sure you allocate an amount to savings.
Precisely, no amount should be left unallocated from your paycheck! In other words, at the end of the month, your budget should equal zero! That’s why you might have heard some people calling this budget plan as zero-sum budget too!
You have to set 5 categories for your expenses! And you should restrict yourself from spending more than the allocated percentage. Let’s have a clear picture!
- For housing, you can spend up to 35% of your net income.
- For transportation, you should plan not more than 15% of your net income.
- For other expenses (such as groceries, utilities, etc.), you can spend up to 25% of your net income.
- For savings, you should set aside 10% of your net income each month.
- And the last category would be debt payoff, of course, if you have debts! You should keep aside 15% of your net income for that.
You might be thinking now that how will you get benefitted after planning a budget?
So, let’s have a quick look!
Helps you in creating an emergency fund
You might have realized the importance of a rainy day fund when you took out a loan during an exigency! If you don’t have a rainy day fund, you tend to take out loan(s) if any mishap occurs! As a result, it makes you vulnerable to the debt trap.
So, it’s highly advisable to keep aside some dollars for your emergency! Your budget should comprise of an emergency fund which includes at least 3 to 6 months living expenses!
But don’t hurry! It will take a certain time to save 3 to 6 months of your living expenses. And following a proper budget helps you to dedicate a fixed amount from your paycheck to your rainy day fund!
Makes you more organized
A proper budget will provide you an apt spending plan for you! When you are strictly following your budget you are less likely to do overspending. In fact, you can follow some ideas (available online) to save money when you are going out for shopping! For example, you can follow some tips when you are going out for shopping at Walmart!
Helps you to retire happily!
It’s very important to contribute to your retirement fund from an early stage of your life! And a proper budget can help you with that. You should keep aside some dollars for your retirement funds like 401(k), IRA, etc. Having a substantial amount in your retirement fund will make your golden days safe and secured.
Helps you to avoid late fees, penalties, etc.
Strictly following your budget helps you to keep aside some funds for your monthly bill payments and all! Earlier, due to lack of a proper budget, you might have missed the payment deadline many times! As a result, you might have shelled out more than your bill amount for paying late fees!
In fact, while planning your budget, you can set your bill payments to autopay! You don’t need to remember different payment dates of your bills and the chances of forgetting bill payments is nil! However, make sure you check the bank statements to be sure that there’s no discrepancy. So, what are you waiting for? Start your budget right now to give a proper shape to your financial life!