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Wednesday, February 29, 2012

Debt - Why Budgeting is a Good Idea


Answering the following question should help you figure out whether you're doing fine with your finances and your budgeting, or whether you need a little more work to manage your personal finances:

What do you use your credit card or overdraft for?
  1. A one-off purchase?
  2. Emergencies only?
  3. Day-to-day shopping?
  4. Your groceries?
Borrowing money for one-off purchases and emergencies can actually help you to build up a decent credit score, so if you answered yes to either one or two, you might not be too likely to get into debt problems - as long as you can afford the repayments. Debt consolidation could help you to lower your monthly repayments if you're doing OK with your finances - and DACuk can provide further information here, including how lowering your repayments might increase the amount of interest you pay overall.

However, if you answered yes to three or four, you might be creating a future debt problem - if you find you need to use credit to afford these essentials. Relying on borrowed money for everyday shopping and groceries is a particular worry if you aren't repaying the balance in full every month. Eventually you're going to reach your credit limit and you might really struggle to get by without a line of credit to fall back on.

If you want to get out of debt quickly, budgeting can basically put more money in your pocket for debt repayments. Everyone manages their personal finances differently, although there are a number of 'best practice' tips that people with the best budgeting skills share.

Live within your means

To begin budgeting, you need to limit the amount you spend every month to the same as, or less than, your income. If you share your income with someone else, this could share the strain - many couples pool their incomes and split big bills between them.

Living within your means probably sounds simple, but it's really not that difficult to overspend over the course of a month, especially if there's a big event like Christmas, or an unexpected expense like a problem with your car.

Tackle this by drawing up a plan of your personal finances for the month ahead and check back every week to see whether you are on target, or overspending. If you are, then you'll know you should try to spend less the week after. Some people like to leave their cash cards at home and get through the week with a fixed amount of cash. Find a way that works for you.

Create a financial safety net

If you are able to live within your means every month, do you have any room for savings? Some people save for treats like holidays, or Christmas and birthday presents, but if you really want to secure your financial future, it's worth putting money aside for a rainy day, just in case.

By the same logic, creating a financial safety net could mean paying off debt instead of saving for the future. If you have existing debts, you might feel you're fine as long as you can afford the repayments, but you're best advised to repay as much of your debt as you can while things are going well - because it becomes more difficult to repay debt when times are tougher.

Swap your spending

It's highly unlikely anyone spends their spare cash on exactly the same things every month. It's up to you what you spend your discretionary cash on, although you could try 'swapping' things around.

For example, if you spend around £20 on clothes or computer games every month, you could overpay your credit card by that amount for a few months instead - which would save you interest overall and get you out of debt faster.

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