Introduction
I’m a huge fan of budgeting. It’s not as complicated as you might think, and it can help you save for things that matter in your life: a new car, a house down payment, or even retirement. But it can also keep you from going into debt—or worse yet, prevent you from getting out of debt if you’re already there.
Track your monthly income.
In order to manage your monthly expenses, it’s important to track your income first.
Income is the money you bring in from all sources—whether it’s from your job or from other investments. For example, if you have a part-time job at a coffee shop and invest in stocks that pay dividends every year, this would be considered “income.”
Your gross annual salary (before taxes) could be Rs. 25k/year but you might still owe money each month because of bad spending habits. On the other hand, if you earn Rs. 0/year but you invest wisely and make wise decisions with any remaining funds so that they grow over time, then this is also considered “income.”
Follow a budget and stick to it.
One of the biggest mistakes people make when trying to get out of debt is not following a budget. A budget is simply an estimate of how much money you will spend in specific categories, such as groceries and entertainment so that you can plan ahead for expenses.
How do I set up a budget?
To start with, figure out which expenses are critical and which ones aren’t urgent or important enough to keep paying for without considering whether they’re actually worth it. Then take stock of what income sources you have coming in each month (whether it’s from full-time employment or multiple part-time jobs). Next, decide what percentage each category will get—for example, 50% food; 30% utilities/bills; 10% savings; 10% miscellaneous spending—and write down your total monthly income and all the other information. Once this information has been recorded on paper or in some sort of online app like Mint or Wally Personal Finance Manager (which syncs with your bank accounts), it will be easier than ever before to make sure those bills get paid on time every month!
Consider the cost of living in your new location and adjust your budget accordingly.
The cost of living in your new location will be different than what you’re used to, and it’s important that you account for this. For example:
- Costs vary significantly by location. A family of four may spend more in Manhattan than they would in Boise, Idaho.
- You’ll also have to take into account the cost-of-living increases that are specific to your household — if one member of your family is older or younger than another member, their livelihood could be significantly different depending on factors like health care premiums or housing costs (or both).
- If you’re moving from one state to another, consider adjusting your budget accordingly so that it fits the new area’s standards.
Put money aside for emergencies and unexpected expenses.
Put money aside for emergencies and unexpected expenses.
You need to have enough money on hand to cover any unexpected expenses that might come up. This way, you’ll be prepared in case something goes wrong—and you won’t be tempted to borrow money from your credit cards or other loans when it happens.
Make sure you save enough for emergencies and unexpected expenses by setting aside a portion of every paycheck toward your savings account. You may even want to put some money into separate accounts for short-term goals (like saving up for a vacation) and long-term ones (like buying a house).
Pay yourself first.
Paying yourself first is a way to get out of debt. It’s also a way to build wealth.
What does this mean? When you pay yourself first, you take the amount that you would normally spend on bills and debt and put it into an investment account instead. This can be in a bank, or it can be with an online company like Acorns or Stash Invest (which I use).
The beauty of this strategy is that it makes paying down debt easy: You just have less money to pay off! And if you’re lucky enough to have extra money left over after your big monthly payments are made, then great! You can throw that into your investments as well.
Be aware of cost-of-living increases.
The cost of living in your new location is going to be different from what you’re used to. That’s why it’s important to keep an eye on cost-of-living increases and adjust your budget accordingly.
A good way of calculating the increase is by using an online calculator, like this one provided by the US Bureau of Labor Statistics: https://www.bls.gov/data/inflation_calculator.htm#cpi
It will help you compare the cost of living where you currently live with what it would be like in another city, state or country. You can also use this same calculator as a reference when making future financial decisions such as buying a house or car so that you don’t end up spending more than necessary on items that are overpriced for their quality (or lack thereof).
Reassess your budget regularly.
It’s important to reassess your budget regularly. This means that you should:
- Re-evaluate your goals and priorities. If you want to pay off debt, for example, then it might be time to make some sacrifices or cut back on things you don’t need.
- Set new goals and priorities based on what’s happening in your life. If a family member gets sick or if someone has an emergency expense, then this could mean changing the way you spend money so that everyone can get by until things return to normal (and in the case of illness or emergency expenses, it also means making sure that any health care costs are covered).
Keep Loan Payments Below 28% of Your Monthly Income
A good rule of thumb is to keep your loan payments below 28% of your monthly income. In other words, if you earn $4,000 per month, don’t take out a loan that costs more than $1,120 per month in total. You might be wondering how you can calculate exactly how much this means for you. It’s actually pretty simple:
First, figure out how much money you make each month by multiplying your annual salary by 12 (or by 240 if it’s hourly). If the number isn’t exact yet because it was rounded up or down while calculating taxes and deductions and such during the year (which is common), just get an estimate based on what really comes through after taxes have been paid. Add in any other sources of income like investments or freelance work and then add any non-essential expenses like eating out at restaurants once in a blue moon or going on vacation every few years; this should give us a good idea about what our average monthly income looks like over time (though again – because these are “non-essential” items – we’re not going too far into detail here).
Secondary considerations include whether there are big expenses coming up soon (like car repairs) or whether something else has happened recently that could impact our ability to pay off debt fast enough (such as having kids).
Follow a budget, look out for unexpected expenses, and you can keep yourself debt-free.
If you want to know how to keep yourself out of debt, the first thing you need is a budget. Before you start thinking about living on two paychecks and saving for the future, make sure that your current income can cover all of your expenses for at least one month.
Make sure that your budget includes enough money to cover:
- Your basic monthly expenses (or more)
- Money for unexpected expenses and emergencies
- Money for health insurance premiums or other health care costs (such as prescriptions)
Conclusion
If you’re new to budgeting, start small. Track your expenses and make a list of what’s important to you. Remember that there are many ways to manage your money and find the option that works best for you. With these tips in hand, we hope that you will be able to keep yourself debt-free!