Did you know that US consumer debt has reached a staggering $14.88 trillion in 2020? That’s $3 trillion more than what folks in the US owed back in 2010!
Now, being in debt isn’t always bad, so long as you can pay it on time and that you don’t let it pile up. Otherwise, you may end up living in debt for years. So you know, 9 million people in the US aged 50 or older are still paying off their student debts.
Fortunately, learning how to create a budget plan can help you live a debt-free life. That’s what we’ll teach you in this guide, so be sure to keep reading.
Factor in Both Your Gross and Net Income
Gross income is the sum of all earnings, such as salaries, wages, and interest payments. However, it doesn’t account for any deductions yet, including taxes.
On the other hand, net income is the difference between your gross income and all deductions. For that reason, it’s a more reliable source for figuring out how much money you get to take home.
However, it’s best to know your gross income to learn if you can remove anything from your list of deductions. These include credits and deductions acknowledged by the Internal Revenue Service (IRS). Some examples are tax deductibles for properties, real estate, healthcare, and education.
From there, you can then calculate your net income. You’d want to know how much it is as it’s what you can spend on your fixed and variable expenses.
List (and Lessen) Fixed Expenses
Fixed expenses are costs that remain unchanged each month.
For instance, suppose you’re part of the 44% of US consumers with an active mortgage. If you have a fixed-rate mortgage, your home loan repayments classify as fixed costs. Rental payments, car loans, car insurance, and health insurance are other examples.
Since those fixed expenses can be hard to trim, you need to look at other costs you can minimize. Doing so can help you create a better personal finance budget that can help you save more.
An example is a TV cable service, which can run anywhere from $44.99 to a whopping $134.99 a month in the US. So if you don’t use the TV that often or don’t watch all channels, you might want to downgrade to a cheaper plan.
Another example is a fixed post-paid cell phone service. If you do most of your calls via the internet, you may want to downgrade it to a lower-cost plan, too.
Tabulate and Trim Variable Expenses
Variable expenses are costs that vary each month. Since they change from time to time, they can be more flexible than fixed costs. That’s especially true for shopping expenditures.
With that said, one of the budgeting methods you can try with variable costs is to cap your shopping list.
For example, suppose you usually spend $100 a week for groceries alone. For better money management, try extending that to $100 per 10 days. That way, you get to save at least $100 on your monthly grocery costs.
Other necessary variable costs are electricity and water bills. Fortunately, you can still lower them with good conservation practices.
For example, make it a habit to turn off lights in empty rooms. Another is to open the curtains so that you can rely on sunlight and avoid using artificial lights. You should also check for and fix plumbing leaks and perhaps, take shorter showers.
Don’t Forget Your Other Debts
In the US, the average personal loan debt in 2020 amounted to $16,458. That’s on top of the average $38,792 student loan debt and $5,315 owed on credit cards.
The thing is, many consumers carry all those types of debts. As such, payments for these debts account for a good chunk of their income deductions.
As such, one of the most crucial budgeting tips is to pay down as much as you can toward your debts. That’s because the longer you hold on to them, the more you pay for interest.
So, by paying off your debts, you can save the money that would otherwise go to paying their interest fees. That also means you can extend your budget for more essential expenditures.
If you’re having a bit of a hard time paying off your debts, consider a debt consolidation loan. It combines existing debts into one lower-rate loan to pay off multiple loans. You can check out this Plenti debt consolidation loan guide for more details on how these loans work.
Set a Realistic Savings Goal
By knowing where your money goes each month, you can create a plan to reduce some of those costs. For example, you can downgrade from a monthly $135 TV cable plan to a $45 one. In doing so, you can already save at least $90 a month, which sums up to a whopping $1,080 a year!
In any case, take note of all areas you wish to save on, and then calculate how much your total potential savings can be. You can then set that as your base savings goal. Then, as your finances improve, you can raise it so that you can put more toward your savings or emergency funds.
You should also automate payments or savings deposits. This way, you can avoid using your money for things other than your financial dues or goals. In addition, it can help you avoid forgetting or missing payments that may incur more fees.
Follow Our Tips on How to Create a Budget Plan Today
Always keep in mind that proper budgeting is key to living a debt-free life. That’s achievable, considering that only about 77% of US households carry debt. That means more than two in 10 families don’t have the added burden of debt.
So, as early as today, follow the tactics listed on this guide on how to create a budget plan. The sooner you do, the sooner you can get your finances back on track.
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