How to Survive the Economy
Create a budget based on your income., Reduce your expenses., Save an emergency fund., Get out of debt.
Step-by-Step Guide
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Step 1: Create a budget based on your income.
A budget based on your income is an effective way to manage your money.
Instead of basing your budget on your past spending habits, which perpetuates the same patterns, build your budget by allocating every dollar you make to a specific line item in your budget.
This method will keep you from spending more than you make.
It will also help you to prioritize your expenses.First determine your after-tax monthly income.
This is the amount of your paycheck each time you get paid.
Next, use the 50-30-20 to break down your expenses.
Using this method, 50 percent of your income should go towards your needs, such as your mortgage, utilities and groceries.
Next, 30 percent should be dedicated to your wants, such as eating out or entertainment.
Finally, 20 percent of your income should go towards savings and getting out of debt.
For example, if your after-tax income is $2,000 per month, then begin by allocating $1,000 to your needs, $600 to your wants and $400 to savings and debt reduction.
Remember that these percentages are only guidelines.
For example, if your housing costs are expensive, you may need to allocate more than 50 percent of your income to your needs until you can secure less expensive housing.
Or, if you have so much debt that even your minimum payments add up to more than 20 percent of your income, you will have to adjust this percentage.
As you create your budget, it will become clear to you that you may need to reduce spending in some areas, and you may also need to focus on getting out of debt in order to become financially stable. -
Step 2: Reduce your expenses.
Look for areas where you can cut spending in order to be able to save more and to get out of debt.
Some of these changes will be easy to implement, while others might involve bigger sacrifices.
However, as you make these changes, you will begin to find that you can spend less than you earn and live within your means.Cut transportation costs by using public transportation or by carpooling.
Save on energy bills by using energy-saving light bulbs like CFL’s or LED’s, lowering the temperature on your hot water heater, programming your thermostat to run less when nobody is home, and air-sealing your home.
Reduce your spending on entertainment by getting rid of gym memberships, reducing or eliminating cable television and canceling newspaper and magazine subscriptions.
Save money on food by opting for home cooked meals over take-out, buying non-perishable items in bulk, using coupons, purchasing generic instead of brand-name items and starting a garden.
Reduce your insurance expenses by opting for higher deductibles on your homeowners and auto insurance, downgrading your health insurance to a less expensive option, bundling your homeowners and auto insurance and choosing term life insurance over whole life.
Other ways to save money include getting a cheaper cell phone plan, spending less on clothing and grooming and quitting smoking or drinking. , An emergency fund is a stockpile of money that you can use to pay for unexpected emergencies.
For example, you can use it to pay for an unexpected home or auto repair or to cover expenses if you lose your job or become sick or injured.
An emergency fund saves you from having to go into debt when these unexpected expenses arise.Set up a savings account that is separate from your checking account.
This will keep your emergency fund separate from your other funds and make you less likely to spend it.
Begin by saving just $25 per week until you have built up a savings of about $250 or $500.
Once you begin reducing your expenses as outlined above, it may become easier to put this money aside.
Next, aim for a goal of saving up $1,000.
After that, aim to save up one month’s worth of income.
Once you get on a roll, continue saving until you have saved up several months’ worth of income.
Only use the money for true emergencies. , Gather your most recent statements from all your loans and credit cards and make a list of all of your debts.
Include the name of the creditor, the interest rate, the balance and the monthly minimum payment.
Once you know how much you owe, make a plan to reduce your interest rates and pay off your debt.Begin by getting your interest rates reduced.
Contact your creditors to ask if you qualify for an interest rate reduction on your credit cards.
Or, you can look into transferring your credit card balances to cards with lower interest rates or zero percent introductory rates.
If you have student loans, visit StudentLoan.gov to look into loan consolidation and refinancing.
Refinance your auto loans to get better rates.
Decide which debt you want to pay off first.
Some people choose to pay off the debt with the highest rate first.
This makes the most financial sense over the long term.
However, another strategy is to build momentum by paying off the smallest balances first.
Choose whichever option works best for you.
Divert as much of your income as possible to the target debt while continuing to make minimum payments on all of your other debts.
Once you pay off your first target debt, focus on another account.
Continue in this manner until all of your consumer debt is paid off. -
Step 3: Save an emergency fund.
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Step 4: Get out of debt.
Detailed Guide
A budget based on your income is an effective way to manage your money.
Instead of basing your budget on your past spending habits, which perpetuates the same patterns, build your budget by allocating every dollar you make to a specific line item in your budget.
This method will keep you from spending more than you make.
It will also help you to prioritize your expenses.First determine your after-tax monthly income.
This is the amount of your paycheck each time you get paid.
Next, use the 50-30-20 to break down your expenses.
Using this method, 50 percent of your income should go towards your needs, such as your mortgage, utilities and groceries.
Next, 30 percent should be dedicated to your wants, such as eating out or entertainment.
Finally, 20 percent of your income should go towards savings and getting out of debt.
For example, if your after-tax income is $2,000 per month, then begin by allocating $1,000 to your needs, $600 to your wants and $400 to savings and debt reduction.
Remember that these percentages are only guidelines.
For example, if your housing costs are expensive, you may need to allocate more than 50 percent of your income to your needs until you can secure less expensive housing.
Or, if you have so much debt that even your minimum payments add up to more than 20 percent of your income, you will have to adjust this percentage.
As you create your budget, it will become clear to you that you may need to reduce spending in some areas, and you may also need to focus on getting out of debt in order to become financially stable.
Look for areas where you can cut spending in order to be able to save more and to get out of debt.
Some of these changes will be easy to implement, while others might involve bigger sacrifices.
However, as you make these changes, you will begin to find that you can spend less than you earn and live within your means.Cut transportation costs by using public transportation or by carpooling.
Save on energy bills by using energy-saving light bulbs like CFL’s or LED’s, lowering the temperature on your hot water heater, programming your thermostat to run less when nobody is home, and air-sealing your home.
Reduce your spending on entertainment by getting rid of gym memberships, reducing or eliminating cable television and canceling newspaper and magazine subscriptions.
Save money on food by opting for home cooked meals over take-out, buying non-perishable items in bulk, using coupons, purchasing generic instead of brand-name items and starting a garden.
Reduce your insurance expenses by opting for higher deductibles on your homeowners and auto insurance, downgrading your health insurance to a less expensive option, bundling your homeowners and auto insurance and choosing term life insurance over whole life.
Other ways to save money include getting a cheaper cell phone plan, spending less on clothing and grooming and quitting smoking or drinking. , An emergency fund is a stockpile of money that you can use to pay for unexpected emergencies.
For example, you can use it to pay for an unexpected home or auto repair or to cover expenses if you lose your job or become sick or injured.
An emergency fund saves you from having to go into debt when these unexpected expenses arise.Set up a savings account that is separate from your checking account.
This will keep your emergency fund separate from your other funds and make you less likely to spend it.
Begin by saving just $25 per week until you have built up a savings of about $250 or $500.
Once you begin reducing your expenses as outlined above, it may become easier to put this money aside.
Next, aim for a goal of saving up $1,000.
After that, aim to save up one month’s worth of income.
Once you get on a roll, continue saving until you have saved up several months’ worth of income.
Only use the money for true emergencies. , Gather your most recent statements from all your loans and credit cards and make a list of all of your debts.
Include the name of the creditor, the interest rate, the balance and the monthly minimum payment.
Once you know how much you owe, make a plan to reduce your interest rates and pay off your debt.Begin by getting your interest rates reduced.
Contact your creditors to ask if you qualify for an interest rate reduction on your credit cards.
Or, you can look into transferring your credit card balances to cards with lower interest rates or zero percent introductory rates.
If you have student loans, visit StudentLoan.gov to look into loan consolidation and refinancing.
Refinance your auto loans to get better rates.
Decide which debt you want to pay off first.
Some people choose to pay off the debt with the highest rate first.
This makes the most financial sense over the long term.
However, another strategy is to build momentum by paying off the smallest balances first.
Choose whichever option works best for you.
Divert as much of your income as possible to the target debt while continuing to make minimum payments on all of your other debts.
Once you pay off your first target debt, focus on another account.
Continue in this manner until all of your consumer debt is paid off.
About the Author
Janice Hart
Committed to making lifestyle accessible and understandable for everyone.
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