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Money Coach

More on Loans and Your Budget

Before we get into specific areas of your budget, let’s take a brief look at how a normal household budget works.

Primarily, all budgets are divided into income and expenses, but most good ones now include a third component, savings. Items in the "income" section can include after-tax salary, pensions, investments and tax refunds.

Items in "expenditure" can include rent, mortgage payments, food, gas, utility bills, childcare, entertainment, gifts and holidays. The "savings" section logs how much you put away each month, after satisfying spending requirements. As much as 10 per cent of total expenses should be put into this category to allow for unforeseeable events such as dental emergencies

One way to attack your budget is to use what some debt counselors refer to as “the snowball method”. Using this strategy, simply list your debts in ascending order with the smallest remaining balance first, the largest last. Do this regardless of interest rate or payment. You will pay these off in this new order. This works because you get to see some success quickly and are not trying to pay off the largest balance just because it has a high rate of interest.

Once you pay off the lowest balance, take that payment and combine it with the next payment on the list, so that each month you're making a larger payment on that debt.
Repeat the process, again and again, so that your payments are getting larger, your debts are being paid off faster, and the process starts to snowball until all your debt are paid.

If you’re one of those people who can’t sleep at night worrying about bigger bills, go ahead and address those bills first. Just rank your debts in order of highest interest rate to lowest. Then whittle away at them in that order. Make sure you are not comparing apples and oranges. The effective interest rate is often different from the nominal rate quoted by the lender. For example, mortgage rates are compounded semi-annually, while rates on credit-card debt are usually compounded monthly.


Your Budget List

Here are some more tips on building a better budget:

1. Don't make your budget too restrictive. Otherwise, you might lose interest.

2. Use precise figures, not just estimates, so you know at any point exactly how much you need or have.

3. Consider using an Excel spreadsheet with two primary components - income and expenditure.

4. Budget sections should be easily understood. For example, include
contractors and housepainters under Home Expenses. Better yet paint the house yourself.

5. Don’t underestimate what you spend. Figure in lunches that you eat in restaurants, movies (including “Pay-Per-View” at home) and other “extra” expenses .

6. Create and manage your budget on a monthly basis. Or, build a budget that’s based on how often you get paid.

7. Review your budget on a quarterly basis for accuracy – and to see how you’re doing.

8. When the economy enters a low-interest rate period,- take advantage of low interest rates to refinance a home mortgage and make lower monthly payments. Numerous Web sites offer instant calculators that will estimate your new payments, including Error! Hyperlink reference not valid. and

9. Add up the fees on your bank statements and shop for a better deal or ask your existing
bank about lower-cost accounts. While you're at it, find out if your employer will automatically deposit your paycheck to your bank account, to minimize the risk of bounced
checks and other mishaps. Consider starting an automatic savings plan that will route some money directly to a separate account before you're tempted to spend.

10. Order a copy of your credit report for $8 from reporting agencies Equifax (800) 685-1111), Trans Union 800 916-8800) or Experian 800 422-4879).

11. Get rid of clutter and raise extra cash by holding a garage sale or get a tax deduction by donating unwanted items to charities. In that case, be sure to keep an itemized receipt of donated goods in case the IRS has questions.

12. Make a detailed household inventory to protect yourself in case of theft or disaster. Engrave your name and an identifying code on high-value items, and record serial numbers. Most insurance companies offer guidelines or even workbooks -- call yours or check out the Nationwide Mutual Insurance Co. Web site.

Above all, keep it fun. Open a bottle of wine, make a date with your loved one, flip a Beyonce CD into your stereo. Saving money will put a smile on your face and make you feel good about yourself. It’s time well spent.

Published Jan 10 2007, 02:40 PM by moneycoach
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