One of the best ways to become debt free is to set up a workable budget. Some families are intimidated by this but in fact it is not hard to do. The main purpose of a budget is to track household income and have an idea of how it is spent each month. Having a budget also lets families know which expenses are important and which ones are unnecessary. Here are tips on setting a budget and living debt free.
Gather your materials
The first step in budgeting is to gather all financial statements and this includes check stubs, income tax returns, bill statements and credit reports. This gives families an idea of what they are working with when preparing the budget.
Start with income you receive
After gathering all financial statements, it is time to write down how much money the household earns every one to two weeks after taxes. Look over previous check stubs to figure out what the average check amount is every pay period. Those with irregular income can find out how much they earn by looking over their previous earnings sheets and tax returns.
Look at your debts and regular expenses
Now that the person knows how much he makes, he should find out his total debt load. The debts include credit card bills, rent or mortgage payments, utilities, internet service, student loans, car loans and insurance. The person would then add these up to determine how much he pays each month in bills.
Remove unnecessary expenses
With the budget in place, families should remove unnecessary expenses from the budget so that they can be debt free. If one family member shops for clothes every weekend, talk with him about the need to cut back on this. Or if another family member subscribes to a magazine, tell her that the subscription should be canceled to free up more money for savings.
Include financial goals
Within the budget should be a section that lists long-term and short-term financial goals and how to best carry them out. These goals might be the purchase of a new home, a new car, family vacation, saving for the kids' college education or an upcoming medical procedure. The goals should be realistic and within the family's income limit.
Discretionary funds
All budgeting and no fun is not great so when creating the budget, families should set aside discretionary funds that they can use as they wish. This takes the boredom out of budgeting and it motivates families to stick to their budgets.
Make savings a priority
Regular savings should be a priority if families want to budget and live a debt-free life. Establish a savings account and contribute to it each pay period. These funds can be used to pay down current debts or prepare for emergencies.
There is freedom in debt-free living. Families are less stressed out and they have more money to use in more meaningful ways such as helping struggling relatives and friends during tough times. This makes budgeting worth the effort.