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Wednesday, July 24, 2013

Five Essential Steps to Budgeting for Loan Repayments

All businesses have budgets, but most people don't sit down and plan out their budget. A budget helps you prioritise and keep track of your spending patterns. It's useful for looking backward and planning your spending and repayments on liabilities such as mortgages, car loans, and cash loans which are useful in emergencies or when you're low on funds. Budgets give you a map to all aspects of your financial health. If you have loan repayments to make, there's no better way to ensure you make your repayments by using a budget. Everyone wanting to take control of their finances should use the steps below to create a comprehensive and effective budget.

Know Yourself

It's an old saying: to know yourself. For budgeting, it is the best starting point for creating an effective budget that you will follow. Make a list of your expenditure in the past month by category and aggregate it for a final figure. Place this next to your monthly income. This will give you a very clear image of the proportion of expenditure in each category and contextualise it in term of your income. How much are you spending and on what? What can and should you cut back on? How can you adjust expenditure to maximising your savings?

Rent/Mortgage/Accommodation Utilities - Gas, Electricity, Water, Internet, Phone, and Mobile Magazines and Books Coffee, Vices (Alcohol and Cigarette), Junk Food Transport costs, including average monly cost of running your car Food - Groceries, Takeaway Food Clothing Social Activities - Movies, Dining Health - Gym Membership, Yoga Investment Outlays - Share, Bond, Property or any other investment outlay Miscellaneous and Significant One-Off Spends Loan Repayments

Prioritise Needs

Be clear about your priorities and know what you can and can't do without. Be realistic and make gradual cut backs where necessary. Make a list of the priorities in order of importance. Then pencil in the intended cut backs by dollar amount.

Have a Long Term Vision

Set long term financial goals and use them to prioritise spending, saving and investments. If your goal is to have a large deposit for a house by a certain age, adjust your budget to meet this goal. Be flexible and sensible about following your budget. If an emergency comes up and you need to take out fast loans or borrow from a friend, don't worry too much about deviating from your budget. It's your commitment over the longer term that counts for budgeting.

10 % - 40% Income-Savings Ratio

You should try and save as much as possible, but everyone is different. An ideal savings ratio is anywhere from 10 per cent to 30 per cent and can be as much as 40 per cent. If you invest money in low risk investments, you may not need to save as much of your income. If you work part time, then it may not be realistic to be saving 40 per cent of your income. Use a figure that suits your situation. You can always start small and work your way up.

Write it Down and Regularly Review

A budget does not have to be fancy - it's the prior thought you put into it that is most important. Use a lined notebook or start up a computer spreadsheet. Review your budget on a monthly or fortnightly basis to keep track of outlays and goals. Don't be too rigid about it - remember to have fun by splurging and rewarding yourself sometimes!


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