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How to Prioritize Your Budget

Sarah Kaufman



Tracking expenses and placing limits on your spending are basic financial rules that can benefit everyone, and yet many Americans still don’t make a budget. But it’s time for them to start — a budget forces you to prioritize, make better decisions and keeps you on track, says Tony Wahl, credit expert for CreditSesame.com.

When it comes to a monthly budget, no one size fits all. That’s why it’s important to identify what expenses are most important to you and base your budget around your own priorities. Follow these tips for prioritizing a budget that will help you more easily achieve your financial goals.

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Determine essential expenses.

The first step in creating any good budget is to figure out what is a non-negotiable expense. For example, unless you’re fortunate enough to be living somewhere rent-free, you probably have to make either a rent or mortgage payment each month. If that’s the case, then you may also have to pay utilities. These are non-negotiable expenses, meaning you have to pay them and they’re not going away anytime soon. Other expenses in this category? Your wireless bill, perhaps medical expenses, and loan payments. You can also choose to put things like gas and groceries in this category, if that makes sense for you. Or, you can do it this way: Add up all of the necessary expenses and subtract the total from your monthly income. The difference is what you have leftover to put toward everything else, such as groceries, gas, a gym membership, entertainment, shopping and dining out.

Plan to minimize debt.

Consumers in the United States have collectively racked up $82 billion in new credit card debt over the last two years alone, according to a 2012 study by credit card comparison and resource site CardHub.com. The biggest cause of it is habitual overspending, says John Kiernan, CardHub editor and senior analyst. Paying down your debts should be a top priority when determining your budget, and your payments should go right up there with your other non-negotiable expenses. The best way to pay off amounts owed, Kiernan says, is to strategically eliminate the balances with the highest interest rates first. Once those are paid off, repeat with the next most expensive balance, and so on. Whatever you do, always continue to at least make the minimum payments (on time), and pay even more if you can.

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Another important aspect of getting out of debt is to stop accruing more, Wahl said. “Be vigilant about not taking out new credit cards or loans unless it is going to help you achieve your goal of paying down your debt,” Wahl said.

Remember that paying you’re your debts is a process, so don’t overthink it. “People often react to debt like deer in headlights,” Kiernan said. “We get paralyzed thinking about all of the potential ramifications and don’t take action. But we also can’t lose sight of the fact that debt reduction is a process. It takes time, diligence, and sacrifice.  In short, having the right mindset pays off when it comes to getting out of debt.”

Identify your savings goals.

What are you saving for? Figure it out and then incorporate it into your budget. For starters, you should always have an emergency fund, which is a savings account that you don’t touch unless you absolutely need it. Putting even just a small amount away each month will be extremely useful in emergencies down the road. The idea is that you have the money and hope you never have to use it.

Next, think about what you want to save for long term. A child’s college fund? A house that you’ll buy in 10 years? Think about how much you’ll need and when, divide it by the number of years you’ll be saving it, divide that by 12, and that’s how much you need to save each month. (Example: If you want to save $60,000 for a down payment on a house, and you’re saving for 10 years, the formula is: $60,000 / 10 = $6,000 / 12 = $500 / month)

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Finally, think about your short-term savings goals. Maybe it’s a vacation in the next six months, or a new car in the next year. Use the same formula as above to figure out how much you need to put away and how frequently.

Give yourself some space to mess up.

Though it may be hard to accept, no one is perfect. You’re going to make mistakes, and every once in a while, you’re going to overspend or stray from your budget just a bit. When creating your budget, give yourself enough wiggle room so that in the rare event that you do go over, you won’t be really hurting yourself financially.

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