Managing Your Budget

Creating a realistic financial budget while staying on track can be an enormous challenge. There always seem to be temptations to spend a little more – perhaps to buy a larger-screen television or a pair of expensive shoes when both purchases can be put on hold until the costs can be figured into the monthly budget.

Unfortunately, if you don’t define your priorities and set viable goals when making your budget, spending can easily go out of control, and serious debt can ensue.

A vital step toward achieving financial freedom includes making a list of all debts to include mortgage, automobile and college loans as well as credit card balances and their corresponding interest rates. Knowing what you owe will give you a clearer financial perspective so you can make that plan and reach your goals.

Debt Management and Debt Management Plans

Debts that grow and grow can be overwhelming. Too many bills and not enough money makes for a stress-filled, difficult and unhappy existence. There are hundreds of credit counseling organizations who advertise they can help by lowering your monthly payments and relieve that stress.

Credit counselors can arrange for consumers to repay debts through a debt management plan (DMP).  According to the plan, you deposit an agreed amount each month with a credit counseling organization and it’s used to pay medical bills, loans, credit cards and unsecured debts according to a schedule.  Sometimes creditors will agree to waive fees or lower interest rates if you are using a DMP.

Unfortunately, not all credit counseling organizations are created equal. A reputable credit counseling organization uses counselors who are certified and trained in counseling, consumer credit and debt management, according to the Federal Trade Commission (FTC), the nation’s consumer protection agency. They will advise you on managing debts and develop a budget as well as offer free educational materials and workshops, as nonprofit organizations have a legal obligation to educate and counsel.

It’s vital to ensure you aren’t trapped by high fees when entering into a DMP, which are not always disclosed, or expected to make “voluntary” contributions that will only increase your debt load.

It’s also important to make your DMP payments on time. If they are late, you run the risk of losing progress on decreasing your debt, or the benefits, such as a renegotiated interest rate or fees.

Managing Your Budget when Unexpected Bills Arrive

A good budget has three simple rules: Don’t spend more than you earn, set aside cash for emergencies and pay yourself first.

The first rule is common sense; every successful business abides by it. Once you have a workable budget in place, setting aside $100 per pay period could add up quickly in an emergency fund. And then give yourself a little something.

Reward yourself for sticking to the plan by giving yourself a (small) allowance. If you don’t spend it, put the balance into savings.

Depending on interest rates, in a year you would have more than $2,600 set aside for when the refrigerator stops working or when the transmission blows. Experts recommend looking at your withholding taxes to find hidden cash.

If you receive a large refund every year, perhaps you need to change your filing status and that additional money can instead be put back in your paycheck and put toward an emergency fund. Unless, that is, you are putting your tax return funds into that fund.

Medical crises in particular can turn upside down even a balanced budget with savings. Negotiate large medical expenses, such as an emergency hospital stay, with the hospital. (Almost all hospitals negotiate fees.)

Insurance companies also have negotiated prices with medical providers, so if you don’t have medical insurance, contact the billing department and request your bill be renegotiated. Often if you contact them immediately instead of waiting until the amount goes into collection, the hospital can set up a payment plan.

If not, a medical bill consolidation may help as it allows you to combine all your medical bills into one lower monthly bill through an agency or a bank loan. This not only makes it easier on you, but the arrangement protects your credit score because you are able to make on-time payments.

The downside is it may take you longer to pay your debt in full.

Good Debt vs. Bad Debt

Not all debt is created equal. It’s helpful to look at your list of financial obligations and identify “good” debt and weigh that against your “bad” debt.

Good debt is something like a student loan. Even banks consider student loans an investment, something that gives you the opportunity to increase your long-term earning power.

At the top of the bad debt category is credit card debt and car loans. On average, credit cards are used for services and consumables: a manicure, clothing or maybe a night out on the town. With car loans, interest rates often run high, especially for young buyers, and cars are depreciable asset. They decline in value over time.

Although having a car is often considered a necessity for most people – used to get to work or get to school – having the right car for your needs and for your monthly incoming is a big part of managing your budget. Car payments can take a big chunk out of your monthly budget without smart planning.