Ways to reduce debt by budgeting

As the world moves out of recession, it's never been more important to assess your finances and sort out any debt problems you may have.

Although the recession will have left a lot of us with debts, it is important to understand that there are ways out. This article aims to highlight ways in which you can reduce your debts by budgeting.

Budgeting is all about understanding and controlling your finances: your income and your expenditure. But how is it done?

Create a realistic budget

To create a realistic budget, you will need to work out your total income (everything you earn/receive each month) and your total expenditure (everything you spend on your 'priority' debts and day-to-day living expenses - so, your mortgage/rent, secured debts, food, petrol, utility bills, etc.).

Then you should subtract your total expenditure from your total income, which will leave you with your 'disposable income'. This is simply the money you have available for saving, spending on yourself, and servicing your 'non-priority' debts (store/credit cards, unsecured loans, etc.).

Keep track of your spending

Now you have your budget, you will be able to see how much money you have available to spend each month. It is important that when you do spend, you keep track of it - it all adds up.

If you fail to keep track of everything you've spent, your budget won't be accurate, and you might find you start running out of money before the end of the month.

By keeping track of your spending you can also see where you are wasting your money, which leads us onto the next point…

Cut back on your non-essential spending

Once you can successfully keep track of where all your money is going, you should be able to identify any areas where you are spending money you could be using to overpay your debts.

By cutting back on this non-essential spending, you can 'free up' money to put towards your debts, so you can clear them faster than you would if you just kept making the minimum payments.

Plan what you need to spend for the month

At the start of every month, sit down and plan out what you need to spend for the weeks ahead - for example, food, travel costs, bills, debt repayments - taking into account any unusual expenses (the kind you just don't run into every month).

Once you have compiled your list, you should add up how much each expense will cost you. Of course, you may not be able to predict how much your travel will cost you, or how much you'll spend on food, so if necessary you'll need to estimate costs like these.

Planning how much you need to spend each month means you will be in much better control of where your money is going. What's more, you will be able to spot early on if you won't have enough money to cover your expenses - and see if you can find a way around it.

Unfortunately, budgeting alone won't be enough for everyone - some people's problems are so serious that their income simply isn't enough to cover their expenses.

If that sounds like you, you should contact a professional debt adviser.

The right debt adviser will be able to assess your situation and let you know if a professional debt solution could be right for you. This will vary from country to country - in the UK, for example, people with unmanageable debt may be able to enter into debt management plans or IVAs (Individual Voluntary Arrangement).

This guest post was written by Melanie Taylor, personal finance expert at financial solutions provider Think Money.

Planning Your Financial Strategy Using Your Rear View Mirror

Let’s start with a metaphor. Your financial strategy is a bit like driving your car. You have a destination; let’s call it Retirement City. You plan your route to get from here to there. This is your savings and investment strategy. You know there will be traffic, bumps on the road, stop lights, highways and maybe even a crazy driver who will cut you off along the way. These are uncontrollable factors much like economic and financial events and life circumstances. Knowing your driving skill, you are confident you will arrive safely at Retirement City.

Now, can you imagine if you tried to make this journey by driving backwards only looking into your rear view mirror? It doesn’t take much imagination to know that you would not attempt to make this journey by only looking in your rear view mirror. Yet many investment decisions are based on recent short-term events. The assumption being that what happened recently will surely happen again. However that’s the past and you are looking into our rear view mirror with this strategy.

Over the past twelve months we have seen enough ups and downs in the markets to last a lifetime. Volatile markets often tempt investors into making financial mistakes. They sell their current “dogs”, perceived as poor investments because they went down, and switch into the next “hot” stock, mutual fund or other investment tip that has showed recent strong performance.

Using short-term trends to support decisions for a long-term investment strategy could be a mistake. No one knows what’s over the next hill or can predict the future. By making snap investment decisions based on recent short-term performance you could find yourself selling, only to determine later that you should have been doing exactly the opposite and buying.

As an investor you have certainly heard the disclaimer “past performance does not guarantee future results.” This becomes clear when we look at a Lipper study of the top quartile large cap US equity mutual funds from 1998 to 2002. The study followed the performance of these funds over the following four years. Only 19% stayed top quartile. Another 25% slipped to second quartile. While 32% of those top performing funds fell into third quartile and the last 24% fell all the way into fourth quartile ranking.

You can’t control the journey to Retirement City, just like you do not know how the economy or financial markets will behave. With proper coaching and discipline you can control your emotion and commit to a financial strategy that is crafted to meet your long-term needs and goals.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of FundEX Investments Inc. to discuss your particular circumstances or suggest a topic for future articles, at 613-798-2421 or e-mail rick@invested-interest.ca