Debt has the ability to ruin lives. If you’ve gotten yourself into debt, you must make an adequate plan in order to take the steps to get out of debt. Paying off your credit cards and other debt is only a part of the equation. The other big part is actually making a budget. Without a clear-cut budget for your money and expenses, you are setting yourself up for failure.

Budgets are key to eliminating debt

One of the big reasons why many people go into debt is that they do not have control over their finances. They will spend money without thinking and will not know what to do when the first big bill comes along. People with budgets are far less likely to go into debt than are those without budgets.

Budgeting is a skill that people often do not learn. Perhaps you’ve been putting it off for some time. That’s understandable, as many Americans seem unwilling to limit their spending in anyway. The American dream is to have as much as possible, and the thought of budgeting is a bit silly.

However, when you look at the big picture (including not just the present, but the future—retirement etc.) it becomes apparent that budgeting is absolutely necessary for survival. Even those who earn comfortable livings and seemingly don’t have to worry about finances can benefit from solid budgeting.

We will be covering the basics of creating a solid budget in this article.

Step 1: Examine Your Salary

Do you know exactly how much you make each month? Without this knowledge, creating a budget will be impossible. Look at your pay stubs for the past few months and see how much, on average, you are taking home (after taxes). This is what you have to work with when you create the budget. This amount must be accurate—otherwise, your whole budget will be off.

Step 2: Look at Your Monthly Expenses

What are you spending your money on each month? Make a list of everything you are spending money on each month (feel free to drag out your monthly bills and check book to see how much you are paying out for each expense). This will include debt (credit cards, mortgages, car payments etc.), insurance (home and auto), utilities (gas and electricity, plus water), taxes (property taxes), groceries, clothing, basically anything that you spend money on.

Step 3: Using the List, Group Together the Items

Using Microsoft Spreadsheet, create a table for your expenses. Group debt-related expenses together (so put your credit card bills, car bills and mortgage bills) in a subject of “debt”. Then group utilities together under a subject of “utilities”. Put insurance bills under a subject of “Insurance”, and then put groceries and other household related costs under a subject of “household expenses”. Finally, put all of these under one big subject of expenses.

Step 4: Write Down How Much You Are Paying in Each Category

For every single item on your list, make a note of how much you are paying. Once again, the information you give must be accurate, or else it could throw off the entire budget.

Step 5: Add Up All the Expenses

At the very bottom of your spreadsheet, make a new category that says “total expenses”. In it, write down the sum of everything on the list. This will show you exactly how much money may, or may not, be left over for “spending”.

Step 6: Subtract the Expenses from the Earnings

Hopefully when you subtract the expenses from the earnings, you get a positive number. ? If not, you’re obviously in too much debt and should seek some form of help for that (be it credit counseling or bankruptcy). Let’s assume, though, that you have money left over after the expenses. This money should be used in a logical way and should be well-planned.

Step 7: Decide What to Do With Excess Money

When you determine how much money is left over, you should then figure out what to do with the money. One of the best things you can do with it is to save. Ideally, you want to save about 10% of your salary. While this isn’t feasible for everyone, it should be for most. If your left over amount is about 10% of your salary, try very hard to save as much of it as possible. If your left over amount is greater than 10% of your salary, you can then feel free to save/invest 10% of it and then use whatever is left to maybe “treat” yourself or your family to something. This could be a vacation or maybe a College savings account for your kids.

Step 8: Write Down What You Are Doing With Excess Money

Create a new category titled “left over money”. Delegate the left over money within that category. You may wish to put down that you’ll be setting aside “X” amount of money each month in a checking or savings account. You may also wish to put down that you’ll be putting aside “X” amount of money each month for extra things like vacations, nights out etc.

Step 9: Make Sure All Amounts Agree

Add your total expenses to the totals of your “left over money” category. Make sure that the two amounts, combined, add up to your salary amount (earnings). If they do, your budget is in balance. If not, you must make necessary changes to your “left over money” category to make the budget in balance.

Tips for Making a Budget Work

Making a budget work isn’t always as easy as setting up the budget. In fact, it can be downright difficult for many people. Here are three easy tips to make your budget work for you.

1. Set aside funds for each category. So if your budget says to spend $200 a month on groceries, only put $200 aside for groceries. Do not overspend.
2. Write down everything you buy and everything that is an expense. Doing so helps to keep you accountable and helps to keep you on the right track as far as the budget is concerned.
3. Always strive to stick to the budget. If you cannot afford something and it is not in the budget, do not buy it. Even if you really want that big screen TV, if you cannot afford it, do not make the purchase as it will completely goof up your budget and your credit.

The bottom line is that if you stick to the budget, you’ll be in good financial shape.