Building A Budget: Credit Card Debt

Building a
Budget
In general, traditional budgeting starts with tracking expenses, eliminating
debt, and once the budget is balanced, building an emergency fund. But to
speed up the process, you could start by building a partial emergency
fund. This emergency fund acts as a buffer as the rest of the budget is put
in place and should replace the use of credit cards for emergency
situations.
The key is to build the fund at regular intervals, consistently devoting a

certain percentage of each paycheck toward it, and if possible, putting in
whatever you can spare on top. This will get you to think about your
spending, too.
What's an Emergency?
You should only use the emergency money for true emergencies: like
when you drive to work but your muffler stays at home, your water heater
dies, or a leak springs in your roof.
You would save money if you used your emergency fund to

eliminate credit card debt, but the purpose of the fund is to prevent you
from having to use your credit card for paying for unexpected expenses.
With a proper emergency fund, you will not need your credit card to keep
you afloat when something goes wrong.
Downsize and Substitute

Now that you have a buffer between you and high-interest debt, it is time
to start the process of downsizing. The more space you can create
between your expenses and your income, the more income you will have
to pay down debt and invest.
This can be a process of substitution as much as elimination. For example,

if you have a monthly gym membership, cancel it. Use half of the money
you save to invest or pay off outstanding debts, and save the other half to
begin building a home gym in your basement. Instead of buying coffee
from a fancy coffee shop every day, invest in a coffee maker with a grinder
and make your own, saving more money over the long term.
Although eliminating expenses entirely is the fastest way to a solid budget,

substitution tends to have more lasting effects. People often cut too deep
and end up making a budget that they can't keep because it feels like they
are giving up everything. Substitution, in contrast, keeps the basics while
cutting down the costs.
Find New Sources of Income

Why isn't this the first step? If you simply increase your income without a
budget to handle the extra cash properly, the gains tend to slip through the
cracks and vanish. Once you have your budget in place and have more
money coming in than going out (along with the buffer of an emergency
fund), you can start investing to create more income.
It is better to have no debt before you begin investing. If you are young,
however, the rewards of investing in higher-risk, high-return vehicles like
stocks can outweigh most low-interest debt over time.
Sticking to a Budget
Now you understand the finer points of budgeting. You've accomplished all
of the above, even put together a nice spreadsheet that lays out your
budget for the next 15 years. The only problem is that sticking to that
budget isn't as easy you thought. That credit card still calls your name, and
your "clothes" category seems awfully small and you feel deprived.
Budgets, you decide, are no fun.
The good news is you don't have to throw it all out the window just
because you've messed up once or twice.
Remember the Big Picture
The point of the budget is to keep you out of overwhelming debt and help
you build a financial future that will give you more freedom, not less. So
think about how you want your future to be and remember that keeping to
your budget will help you get there. Adding to your debt load, on the other
hand, will mean that your future could be even tighter.
Remove the Options That Allow You to Cheat on Your Budget
Make it more difficult on yourself to make impulse purchases; in other

words, set up barriers so you have time to stop and think: "Is this purchase
necessary?" Take yourself off retailer email lists. Remove your stored
payment information on your favorite online shops so you can't just click to
order.
Find Some Support

If you feel like you're the only one in your group who is on a budget,
search and find some like-minded folks. It could be an online forum, a
monthly meeting, or even just a couple of friends traveling the same
budgetary road. You need to know you're not the only person setting sane
financial limits for yourself. You can also have accountability with your
frugal buddies, talking things over and each other out of temptation.
Go Old School
There's something powerful about handing over a stack of $20 bills for

purchase: It causes you to really think about the amount of money you're
about to spend. Swiping a debit card, on the other hand, may not feel
nearly as real. Similarly, paying bills by writing checks and promptly
entering the sums into your register keeps you up-to-date on how your
account is affected in a way that autopay doesn't.
You don't have to use cash exclusively or completely forgo online

payments, but handling transactions in old-fashioned ways can make you
realize how much you're spending and enhance the power of self-
regulation.
Reward Yourself
If you are constantly looking at what you have to cut and give up, the very
act of budgeting will become distasteful. A mixture of long- and short-term
gifts to yourself will help keep you motivated. When you've been faithful to
your budget for a month, give yourself a reward. Even small ones can
help, such as a night out with friends, a concert or a little extra cash for
spending. Keep visual reminders of these rewards or the things you're
saving up for. Start building associations in your brain—that sticking to
your budget has a pleasurable result.
Schedule a Periodic Budget Evaluation
It's difficult to predict how much money you'll need in every category of life;
a new job may necessitate a wardrobe change and your clothing budget
may not cut it. That's why it's important to have a regular check on how
you've created your budget. If it isn't working, tweak it. It is your budget,
after all—just make sure you keep your long-term financial goals in the
picture.
Educate Yourself
Instead of taking the more common road of instant gratification, which

leads so easily to overspending and endless debt, learn all you can about
finances, money management, and how you can best invest in yourself.
Talk to your financially savvy friends and get real-world tips and advice
from people who are doing well with their money.
The more you learn about handling money wisely and its rewards, the
more concrete the reasons for budgeting will be, and the better you will be
at not only creating a budget that works for you, but also sticking to it.
Ways To Budget When You're Broke

Budgeting strategies sound fine, but if you're in dire straits financially
or suffering from mounting bills and a lack of funds, there are some other
possible steps to take.
1. Avoid Immediate Disaster
Don't be afraid to request bill extensions or payment plans from creditors.

Skipping or delaying payments only worsens your debt—and besides, late
fees ding your credit score.
2. Prioritize Bills
Go over all your bills to see what must be paid first and then set up a
payment schedule based on your paydays. You will want to leave yourself
some catch-up time if some of your bills are already late.
If this is the case, call the bill companies to see how much you can pay
now to get back on track toward positive status. Tell them you are taking
strict measures to catch up. Be honest about the amount you can afford to
pay; don't just promise to pay the full amount later.
3. Ignore the 10% Savings Rule
Stashing 10% of your income into your savings account is daunting when
you're living paycheck to paycheck. It doesn't make sense to have $100 in
a savings plan if you are fending off debt collectors. Your piggy bank will
have to starve until you can find financial stability.
4. Review Spending
To fix your finances, you need to get a handle on your outlay first. Online
banking and online budgeting software can help you categorize spending
so you can make adjustments. Many people find that just by looking at
aggregate figures for discretionary expenses, they are spurred to change
their patterns and reduce excessive spending.
5. Eliminate Unnecessary Expenses
Once you've got a sense of where the money goes, it's time to tighten up.
All cutbacks should start with items you wouldn't miss or habits you should
change anyway—like reducing your fresh food purchases if you find
ingredients spoiling before you can eat them. Or preparing meals at home
more instead of going to restaurants or getting takeout.
Some expenses you shouldn't drop but might be able to adjust could
include reducing your auto insurance rate by switching carriers.
6. Negotiate Credit Card Interest Rates
There are other proactive ways to reduce expenses. Those killer interest
rates on your credit cards aren't fixed in stone, for example. Call the card
company and ask for a reduction in the annual percentage rates (APR); if
you have a good record, your request might be approved. This won't lower
your outstanding balance, but it will keep it from mushrooming as fast.
7. Keep a Budget Journal
Once you've gone through these steps, monitor your progress for a few
months. You can do this by writing everything you spend in a notebook, via
budgeting apps on your phone, or with that software you used in step 4 to
review your spending.
How you track your money isn't as important as how much you are
tracking. Focus on ensuring that every cent is accounted for by dividing
your expenses into categories. Fine-tune and adjust the spending as
needed after each month.
8. Seek New Income
For the time being, saving and investing money is out. But consider ways
to increase earnings: working overtime, getting a second job, or picking up
some freelance work.
A budget isn't a prison cell to keep you away from your money. Rather, it's
a tool you use to make sure your future is better—and yes, richer, than
your present.

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Building A Budget: Credit Card Debt

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Building a

The key is to build the fund at regular intervals, consistently devoting a

You would save money if you used your emergency fund to

Downsize and Substitute

This can be a process of substitution as much as elimination. For example,

Although eliminating expenses entirely is the fastest way to a solid budget,

Find New Sources of Income

Remember the Big Picture

Remove the Options That Allow You to Cheat on Your Budget

Make it more difficult on yourself to make impulse purchases; in other

Find Some Support

There's something powerful about handing over a stack of $20 bills for

You don't have to use cash exclusively or completely forgo online

Schedule a Periodic Budget Evaluation

Instead of taking the more common road of instant gratification, which

Ways To Budget When You're Broke

1. Avoid Immediate Disaster

Don't be afraid to request bill extensions or payment plans from creditors.

3. Ignore the 10% Savings Rule

6. Negotiate Credit Card Interest Rates

7. Keep a Budget Journal

8. Seek New Income

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