The obvious answer is you can't fix your credit if your budget is not balanced. The first and most important step to take before undertaking any credit improvement initiative is making sure you have a realistic working budget.
Preparing a budget requires accurate information about what you have spent and what you have made over the last 12 months. Then and only then can you accurately project what you will take in and spend over the coming months. For more information on budgeting check out my Personal Finance Pathway website at www.7164800.com or www.confidentdecision.com
Here is an article I wrote recently on the topic of budgeting.
The Importance of Budgeting
Budgeting is the foundation for achieving financial independence. Budgeting helps you use your money in a way that reflects your values and priorities. Ideally you prioritize your resources according to your values or what is important to you. If your finances are in a state of disarray due to unforeseen circumstances then I would suggest that "Survival Priorities" are needed to organize your financial priorities.
The Importance of Your Priorities
Whether you know it or not, you are always setting your financial priorities. Some may decide that a new stereo system is more important than this month's electric bill. This may be a little off the wall, but it is still setting your priorities.
Anyone wanting to better manage their money would be wise to determine what their financial priorities are and stick to them. Of course, if you see that these priorities will not put food on the table and pay your bills, then you will have to rethink your priorities.
Setting your priorities is simple. You just determine the most important aspect of your finances and put that item on top. However, if you decide on that stereo over your electric bill, you may find yourself in the dark with no need for a stereo.
There are basic priorities that pertain to everyone. These are simply a matter of survival. Here is a list of the basics:
Water
Food
Shelter
That was a tough one.
What does it take to ensure that our basic needs are met? The main ingredient is a source of income to pay the rent or house payment, pay the utilities, and buy the groceries. This is where you start setting your priorities.
Before you can spend another penny, you have to take care of what you need to survive. Don't put off the rent or house payment, utilities, and don't skimp on your groceries and necessary health items. If you do, you will start experiencing money problems much sooner than you would if you had delayed paying other bills instead.
What's next? If your source of income happens to come from a job, then I would say your transportation. You have to get back and forth to work so you can afford all of the other stuff. This would include your vehicle payment, gas, insurance and maintenance. If your source of income is not a job, then go to the next step.
And Now? Naturally, this would be your other bills. You can even split this category a little further.
First, you have your bills that are secured by property. You should always pay these bills first.
Secondly, your unsecured bills which are probably credit cards.
The reason you should always pay your secured bills first is that it is much more likely that they can take the secured property and probably will unless payment is made. While credit cards companies are notorious for their threats, they very seldom follow through. I'm not saying not to pay them, I am saying they aren't as high a priority as your secured bills.
Next would be your savings. I really to hate to list savings as your last priority because having a savings can prevent the use of those dreaded credit cards and help in so many ways. If you have the money to cover all of your other priorities, then you should always put savings at the top of the list. However, if you don't have enough money to cover your bills and expenses, then your savings will have to be the first to go.
Your Survival Priorities
The below list is an example of what your financial priorities should look like during a crisis situation:
1. Groceries and Necessary Health Items
2. Housing (Rent or House Payment)
3. Utilities
4. Transportation
5. Secured Bills
6. Unsecured Bills
7. Savings
Let's hope that you never get in the position to have to decide which of the above list will have to wait. But if you do, following the above priorities is absolutely necessary to ensure your survival.
Gathering Your Information
Before you can prepare a budget, you should adopt a systematic approach to tracking your spending. Ideally you would gather receipts and log all spending for a period of thirty days.
Helpful information to gather would be your monthly checking account statements, monthly utility bills, credit card statements and receipts for all cash expenditures such as gas, groceries, lunches and other incidental expenses. Carry a small planner or note book to log any other miscellaneous expenses.
Preparing Your Budget
The next step is to categorize your current spending. You then enter the totals in the corresponding category under current expense. After you have completed this step you may be surprised at how much you are spending on things that are not important to you. This is a golden opportunity to align your expenses with your priorities and trim the line item in your proposed budget. On the next page you will find a sample budget form.
3 Keys to Living With a Budget
Recording Income and Expenses
Record keeping is perhaps the most unpleasant aspect of budgeting, but it is necessary. Our concern should be primarily with how to do it most efficiently, since most people resent doing extensive bookkeeping every evening or weekend. Here are some tips.
•· Avoid Cash
•· Code Income and Expenses
•· See If Your Bank Can Help
•· Use a PC
Updating Your Income and Expense Plan
After all income and expense items have been accounted for, the next step is to update your monthly income and expense plan by recording actual amounts and then comparing them with the budget. This is usually done monthly, and it is done best with an income and expense plan update.
If the actual amount for a line item differs from the budgeted figure, it is called a variance. Variances can then be either favorable-meaning they assisted in the saving effort-or unfavorable-meaning they detracted from it.
The following are examples of variance:
•· An income variance is favorable whenever it exceeds the budgeted amount; it is unfavorable when the reverse is true.
•· An expense variance is favorable whenever it is less than the budgeted amount, and it is unfavorable in the reverse case.
•· The cumulative variance figure results from adding the current month's variance to variances of previous months.
Evaluating and Modifying Activities
To stay within your budget, you have to continuously adjust your expenses during the year. Evaluating and controlling your activities really makes your budget work; an elaborate recording system will do little good if you choose to ignore the information it provides.
In addition to monitoring activities and calculating cumulative variances on a monthly basis, a year-end review can be helpful. It helps in making budget estimates for the next year. It also provides an opportunity to prepare the current year's income statement.
Budget Consultation
No matter what type of goals or plans you have in life a budget can lead to success. If you aren't experienced with a budget don't hesitate to ask your Financial Alliance Partner to set up a budget consultation for you. Today is the first day of the rest of your life. Make sure you are on the right path!
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