Last week, we provided insight into the importance of checking your credit report once per year. On a parallel path to working through inaccuracies or negative information on your credit report, your next step is to establish a budget that will help you get ahead. Though many Americans live paycheck to paycheck, this can be dangerous territory. It is simply not a sustainable process. And, if something goes wrong such as you incur an unanticipated medical expense, you experience a job loss, or other, you can quickly find yourself in a position where staying on top of your bills is no longer possible.
When you get behind in your bills, you risk a negative impact to your credit score. And though many choose to take out Spotloans or come up with other financial resources to ensure payments aren’t missed (and thus reported to a credit bureau), this can become a very expensive endeavor.
Living paycheck to paycheck is not uncommon for today's Americans. However, it can cause challenges for those who may need to take on additional debts. If this feels like you and you also resemble one of the following indicators, it is time to put some financial recovery plans into motion.
Thus, if you are in a situation where you are living paycheck to paycheck or you are getting further and further behind every month, it is time to reassess. It isn’t always possible to earn more money and so it is important to be smarter with the money you have. To ensure that you don’t get into a financial situation that you can’t get out of, it is likely time to apply a 50/20/30 budgeting approach. In its simplest approach, this budgeting system takes your after-tax income and allocates it as follows:
Your needs include those items such as mortgage or rent, car payments, insurance, health care, groceries, utilities, and debt payments. And if you are doing it right, make sure that your needs don’t include things like eating out or your Netflix subscription (those should go in the wants category).
On the flip side, your wants should include expenses related to going out or eating out, subscription-based items, new gadgets, vacations and holidays, etc. This budget category is all about the fun things that you want to spend your money on, to make life more enjoyable.
Finally, the remaining 20% should be invested in the future. This might mean that the money gets socked away in a savings account or rainy day fund. Or, perhaps you will want to contribute money towards a Roth IRA to help with your retirement. Wherever you choose to place these funds, the goal is to set yourself up for a financially sound future. This said, if you are new to adopting the 50/20/30 budgeting approach, you may want to consider your current debt situation. If your credit card and other debts have started to get out of control, you may want to adjust your 20% to 10% for the next 12 months, and take that remaining 10% to help eat away at that debt. Not only will this help you live within your means in the future, but it will also help you to improve your credit score.