Saturday, September 10, 2011

The Importance of Budgeting - Try to Live Within Your Means

We all have spending habits that we could alter in order to save for retirement, or our kids college education, a family vacation or simply to help us get out of that pay check to paycheck lifestyle that so many of us suffer. Budgeting has probably never been as important as it is today, given the serious state of our economy. Learning to live within our means can greatly increase our standard of living and reward us with less stress about our futures and those of our families.

Creating a budget and living within it are two very different things. There are always things that we want (or need) and in cases of those with good credit; credit is so easy to get. We want to discuss some ways to help you establish some good budgeting habits.

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First, why do you want to budget? You and your family need a pretty good reason or you won't feel any obligation to do what it takes. Do you want to get out of and/or stay out of credit card debt? Do you want a new car or a vacation? Whatever it is, you need a good reason to help ensure that you won't be enticed to overspend. Write down your reasons or goals and put it somewhere you will see it every day.

Second, look into your family spending. Are you accurately tracking your expenses and are you doing it regularly? If you aren't looking at your expenses every few days, you probably don't have a very good idea how much money you have and how you're spending it. Spend a few minutes each day or at the end of the week updating your records instead of saving it all for the end of the month or worse yet waiting until tax time).

Third, figure out why and where you're overspending. Look at your expenses and see where you could have saved or eliminated spending altogether. Did you have a significant, unexpected medical, house, or auto expense? Does this happen often? Establishing some short-term savings can help cover these expenses when they occur.

Start looking at re-occurring spending habits and their affects over an extended period of time, maybe as a year. For example, if you spend a week in ATM withdrawals', that's over 0 per year. Try to eliminate withdrawals from ATM's outside your banks free network, make a trip to your bank and withdraw the cash you'll need over the course of week, get a debit card and limit your use of cash or cut back to twice a month (or less) and that's at the least, a per year savings!

Here are some other ways to amend your budget:

o Increase your car insurance deductible to 00.
o Shop around for better insurance rates.
o Look into refinancing any open auto loans.
o Conserve utilities when possible.
o If you still have a land line phone, get rid of it. You probably use your cell phone most of the time anyway. I haven't had a land line for 6 years at a savings of nearly a month
o If you have cable or satellite TV, make sure that you have the plan that best fits your needs, think about eliminating as many premium channels as possible.  
o Consolidate your credit card and other consumer debt into a home equity loan and then cancel the cards, cut them up, and don't apply for new ones.
o If you're renting, try to buy a house; tax advantages for paying home loan interest often make it cheaper to own than to rent.
o Eat out less; brown-bag your lunch; find less expensive places to eat.
o Find cheaper entertainment (rent a movie instead of going out to one).
o Consolidate errands to use less gas.
o Limit grocery shopping to one day a week; shop at more than one store for groceries; I use a local market for all of my meat purchases and another for almost everything else, this saves me at least a month.
o Shop for a better long-distance calling plan or cell phone plan.
o Borrow books from the library instead of buying them.

Here's a worksheet you can use to help determine your Debt-to-Income Ratio. Lenders will use this formula to assess your abilities to repay any new debt.

BUDGET WORKSHEET

Rent/Mortgage   $ ________________
Credit card payments  $ ________________
Debt Service Payments  $ ________________

(Loans, equity lines of credit, 2nd mortgages, Finance companies, etc.)

Student loan payments     $ ________________

(include any that you are currently paying and any that will come due during the term of the new auto loan)

Miscellaneous reporting debt (on your credit report)   $ ________________
Open auto loans and car insurance    $ ________________
Estimated new car payment  $ ________________

Total   $ ________________

Divided by your gross monthly income of;    $ ________________

This total, after rounding up or down, is Your Debt-to-Income Ratio (DTI)  % _______________

Once you've determined your DTI, you'll need to make some hard decisions. If your DTI is higher than 35% it will be tough to qualify for a new auto loan, that is unless you have a very high credit score. Factors such as job time, length of residence and large disposable income might help overcome high DTI's.

Disposal income is important only in cases of higher than average incomes. If you make ,000 a month and have a 50% DTI, you still have ,000 left over and this will make a difference to a lender, again your credit score will be an important factor. This exception won't usually help someone with a low score.

The Importance of Budgeting - Try to Live Within Your Means

Gary McClure, President and Founder of CMAC Enterprises, is the author of The Insiders Secrets: The complete Guide to Buying the Right Car, Paying the Right Price and Financing at the Right Terms and Rates.

To follow all of Gary's tips and advice on Financing, Credit and Auto purchasing, visit Gary's Blog or learn about all of the services CMAC offers at The Insider's Secrets website.

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