KEY TAKEAWAYS

Building a Budget

In general, traditional budgeting starts with tracking expenses, eliminating debt, and once the budget is balanced, building an emergency fund. But to speed up the process, you could start by building a partial emergency fund. This emergency fund acts as a buffer as the rest of the budget is put in place and should replace the use of credit cards for emergency situations.

The key is to build the fund at regular intervals, consistently devoting a certain percentage of each paycheck toward it, and if possible, putting in whatever you can spare on top. This will get you to think about your spending, too.

What’s an Emergency?

You should only use the emergency money for true emergencies: like when you drive to work but your muffler stays at home, your water heater dies, or a leak springs in your roof.

You would save money if you used your emergency fund to eliminate credit card debt, but the purpose of the fund is to prevent you from having to use your credit card for paying for unexpected expenses. With a proper emergency fund, you will not need your credit card to keep you afloat when something goes wrong.

Downsize and Substitute

Now that you have a buffer between you and high-interest debt, it is time to start the process of downsizing. The more space you can create between your expenses and your income, the more income you will have to pay down debt and invest.

This can be a process of substitution as much as elimination. For example, if you have a monthly gym membership, cancel it. Use half of the money you save to invest or pay off outstanding debts, and save the other half to begin building a home gym in your basement. Instead of buying coffee from a fancy coffee shop every day, invest in a coffee maker with a grinder and make your own, saving more money over the long term.

Although eliminating expenses entirely is the fastest way to a solid budget, substitution tends to have more lasting effects. People often cut too deep and end up making a budget that they can’t keep because it feels like they are giving up everything. Substitution, in contrast, keeps the basics while cutting down the costs.

Find New Sources of Income

Why isn’t this the first step? If you simply increase your income without a budget to handle the extra cash properly, the gains tend to slip through the cracks and vanish. Once you have your budget in place and have more money coming in than going out (along with the buffer of an emergency fund), you can start investing to create more income.

It is better to have no debt before you begin investing. If you are young, however, the rewards of investing in higher-risk, high-return vehicles like stocks can outweigh most low-interest debt over time.

Sticking to a Budget

Now you understand the finer points of budgeting. You’ve accomplished all of the above, even put together a nice spreadsheet that lays out your budget for the next 15 years. The only problem is that sticking to that budget isn’t as easy you thought. That credit card still calls your name, and your “clothes” category seems awfully small and you feel deprived. Budgets, you decide, are no fun.

Ways To Budget When You’re Broke

Budgeting strategies sound fine, but if you’re in dire straits financially or suffering from mounting bills and a lack of funds, there are some other possible steps to take.

1. Avoid Immediate Disaster

Don’t be afraid to request bill extensions or payment plans from creditors. Skipping or delaying payments only worsens your debt—and besides, late fees ding your credit score.

2. Pioritize Bills

Go over all your bills to see what must be paid first and then set up a payment schedule based on your paydays. You will want to leave yourself some catch-up time if some of your bills are already late.

If this is the case, call the bill companies to see how much you can pay now to get back on track toward positive status. Tell them you are taking strict measures to catch up. Be honest about the amount you can afford to pay; don’t just promise to pay the full amount later.

3. Review Spending

To fix your finances, you need to get a handle on your outlay first. Online banking and online budgeting software can help you categorize spending so you can make adjustments. Many people find that just by looking at aggregate figures for discretionary expenses, they are spurred to change their patterns and reduce excessive spending.

4. Eliminate Unnecessary Expenses

Once you’ve got a sense of where the money goes, it’s time to tighten up. All cutbacks should start with items you wouldn’t miss or habits you should change anyway—like reducing your fresh food purchases if you find ingredients spoiling before you can eat them. Or preparing meals at home more instead of going to restaurants or getting takeout.

Some expenses you shouldn’t drop but might be able to adjust could include reducing your auto insurance rate by switching carriers.

5. Negotiate Credit Card Interest Rates

There are other proactive ways to reduce expenses. Those killer interest rates on your credit cards aren’t fixed in stone, for example. Call the card company and ask for a reduction in the annual percentage rates (APR); if you have a good record, your request might be approved. This won’t lower your outstanding balance, but it will keep it from mushrooming as fast.

6. Keep a Budget Journal

Once you’ve gone through these steps, monitor your progress for a few months. You can do this by writing everything you spend in a notebook, via budgeting apps on your phone, or with that software you used in step 4 to review your spending.

How you track your money isn’t as important as how much you are tracking. Focus on ensuring that every cent is accounted for by dividing your expenses into categories. Fine-tune and adjust the spending as needed after each month.