This 1 Thing Could Be Your Ticket to Avoiding Debt
Hint: It's something we all have access to.
Millions of Americans are drowning in debt, and the psychological impact of owing money can, in many cases, be just as bad as the financial impact. In fact, according to a survey by The Ascent, 28% of people with debt say they worry about it every single day.
If the idea of owing money doesn't sit well with you, then there's one smart financial move you can make that might keep you debt-free: following a budget.
How budgeting can help you avoid debt
If you don't have a budget, it's hard to know exactly what your various bills cost and how your monthly spending compares with your earnings. It's also hard to know how much you can afford to charge on credit cards, which are an easy source of expensive debt if you don't manage to pay them off in full.
On the other hand, if you put a budget in place, you'll know exactly what your essential bills look like, how much you can sock away in a savings account, and how much you can afford to spend on luxuries.
How to set up a budget
If you're new to budgeting, the idea can seem intimidating, but rest assured that it's pretty straightforward. First, comb through your bank and credit card statements from the past year to get a sense of a) what your recurring bills look like, and b) how much they cost you.
Keep in mind that some of those numbers will be fixed, like your car payment or rent, while others will be variable, like your grocery bill. In the case of variable bills, landing on an average is generally your best bet. In other words, if your grocery spending falls between $200 and $300 most months, and averages out to about $250, you can use $250 in your calculations.
Once you've listed your various expenses on a spreadsheet, compare your total monthly spending to your earnings, and see how the numbers shake out. If there's room left over for savings and some wiggle room (in case certain bills come in higher than expected), then you're in decent shape and can probably continue spending at the level you're used to. But if you see that your current monthly spending leaves you with no room for savings and no flexibility, then you'll need to cut back on some expenses.
Imagine you work up a budget and see that you have absolutely no money left over each month for savings or emergency expenses. If you cancel your $100 monthly cable package and cut your monthly leisure spending from $250 to $125, you'll have $225 left over each month to put in the bank. That way, you'll be less likely to get stuck with debt when unplanned bills rear their ugly heads. At the same time, you'll know that spending $400 a month on leisure just isn't doable, because going that route is likely to land you in debt. Without a budget, you may not come to that realization until it's too late.
Don't put your finances or mental health at risk
Carrying debt can have serious consequences and you're better off avoiding it. Putting a budget in place and sticking to it could spell the difference between racking up debt and enjoying the peace of mind that comes with not owing money at all.
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Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
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