Manage Your Home Budget To Control Your Debt
The Covid-19 pandemic has disrupted life as we knew it. Everything from health and business to education and household budgeting has been hit and people everywhere are scrambling to bring some sense of order and control over their lives again.
One of the hardest-hit areas has been the financial health of economies and individuals, in particular households. The last few months have been particularly stressful for many households because many people have been unemployed and furloughed. Moreover, if you consider those who have been infected then it has been particularly difficult for them as they have been sick, isolated and at the same time burning through their savings.
Financial stress, therefore, is increasing with each passing day and IMF has reiterated their concerns that a global financial crisis is on its way. In such an uncertain situation it makes sense to revisit our personal financial management and see if we can tweak our home budgets to manage them properly, increase our savings rate and avoid debt.
So let us look at some tried and tested methods to manage your home budget much more effectively.
1. Cash Inflow and Outflow
If you already are in the habit of making a monthly budget then this step is irrelevant for you. You can move on to the next step if you want to. If however, you are making your budget for the first time then you need to list your cash inflows and cash outflows.
Cash inflows are all of your income streams. This can be in the form of your take-home pay, interest income, dividend income etc.
Cash outflows are all of your expenditures. You’ll probably need more time to compile a list of all of your cash outflows. Include your monthly utility bills, grocery bills, mortgages and insurance premiums in the list.
2. Compare The Inflow And Outflow
Once you have compiled a list of your monthly inflows and outflows, now you need to compare them both. This comparison will give you your savings rate. For example, if your cash inflow is $5000 and out cash outflow is $4000. Then you are saving $1000 each month and this amounts to 20% of your income. So your savings rate is 20% whereas your expenditure rate is 80%.
This comparison will give you a basic idea about your financial management. From here you can determine what needs to be done.
3. Savings Rate
Look at your savings rate. Is it good? An average family can easily manage a savings rate of around 30% to 35% and with some proper financial management and expenditure control, this savings rate can be increased to 40% to 45%. Especially if you are under lockdown then your expenses must have reduced significantly. If not, then you need to reconsider your expenditure choices. Many employees are working from home and this has caused savings on the cost of commutation.
If your savings rate is low, then you should focus on increasing it. If it is satisfactory then still you should look for ways to increase it if possible. Remember, financial crisis lays ahead and therefore the more you can fortify yourself as this point, the better.
It is even possible to take your savings rate up to 50% to 60% but doing so will require some serious lifestyle changes. FIRE enthusiasts can easily take their savings rate to this high level, so if you are aiming for this high level then you should read up about the FIRE lifestyle.
4. Cutting Expenditure
One of the most important ways to stick to your budget and to make it better is to cut your expenditures. Take a good look at your grocery list and see which items are unnecessary. Similarly, take a look at your monthly expenditures and see what you can live without.
You`ll need to keep a check on that impulse purchase habit if you really want to control your expenditures. Impulse buying is a habit that makes us purchase goods that we do not really need but end up buying anyway because we simply cannot control our impulse.
How many times has it happened that you went to the grocery store for groceries and ended up buying a pair of shoes, a pair of trousers and some table coasters that were on sale? That’s right, we all have fallen prey to impulse buying. Well under the current situation we all need to control our impulse purchase habit.
In order to ease yourself out of this habit, you can give yourself an impulse purchase allowance. This should be a limited amount of money that you keep aside for impulse buying.
Next up, try to see expenditures that you can cut, do you really need that cable subscription? Maybe you can get our news from the internet? Most people rely on services like Netflix and Amazon prime these days to consume content therefore cable television is losing its appeal. You can watch live streams of news channels on the internet and in this manner save up money on a tv cable subscription.
If you have a habit of eating out, this is the best time to curtail it and get into the habit of cooking and eating at home. Yes, this sounds like a lot but it is also a lot cheaper than dining out or having take away, especially now when no one knows when this pandemic will end.
5. Pay Your Card Debt
If you have got any outstanding credit card debt then pay it as soon as possible because the interest on it will compound and make it difficult to pay it off. If you do not have any credit card debts then try to limit the purchases through your card. In times like these, the best thing you can do financially is to avoid any type of debt at all. Credit card debt can quickly turn into a mountain of debt if not managed properly. Therefore if you have card debt then try to pay it off before financial troubles hit.
Try to follow these guidelines in order to stay within your budget during this crisis and in addition to these steps also lookout for ways in which you can invest your savings because savings must be complemented by an investment so that they can grow over time.
These times are difficult and therefore we must all focus more on our personal financial management to make sure that our finances stay within a manageable limit. This isn’t very difficult to achieve it only requires some management and organizational skills. Hopefully, these guidelines will benefit you and if you find them useful do share them with friends and family members so that they can benefit as well.
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Also See : Step by Step Guide to Getting Out of Debt