In all my years of working with people on the brink of foreclosure, budgeting came up a lot, and it was always an issue. Part of the major issue for many people on the verge of losing a home is a combination of chronic overspending, massive debt and little to no savings or investments. On top of those catastrophic habits, a loss of income is a devastating blow that sends homeowners in a tailspin down the road to foreclosure. Take a practical look at this budgeting example, and cut backs this family made and you will see areas you can cut back to increase your savings and avoid financial disaster.
For the sake of transparency, I am going to use a budget example with some common mistakes I have seen over the years, and how to correct them.
Mark and Donna
Mortgage: $1,400 (home owner’s insurance and property tax included)
Car payment 1: $425
Car payment 2: $400
Car insurance: $225
Trash & Sewer: $30
Home phone: $40
Cell phone: $230
Dining out: $300
Visa payment: $30
MasterCard payment: $30
Kohl’s payment: $30
Gas card payment: $30
Total income: $5,000
Total expenses: $4,980
Left over: $20
What should these chronic over spender do? It is simple plan, and one that keeps them in their home.
-Sell one car, and save up to buy a second car in cash, this frees up a big chunk of money and cuts fuel expenses in half.
-Cut down on electricity use, by turning off lights, and other devices.
-Cut out the home phone.
-Cut the dining out and entertainment budgets in half.
-Pay a little more on the credit cards, instead of the minimum payments.
-Make sure to save 10 percent of his income as a line item in the budget.
By taking care of these 6 items, Mark and Donna free up $940 a month. Mark and Donna then allocate $500 per month (10 percent of their income) into savings, leaving them with $440 per month to put directly toward credit card debt. As they pay off each credit card, that’s $440 per month additional that can be added to their savings account. After their credit card debt is paid, Mark and Donna will save $940 per month, or $11,280 per year that they will earn interest on. In the event of a loss of income, that savings cushion is enough to pay for all of their expenses for nearly three months, giving them time to secure new employment and stabilize.
Look at your own budget, and see where you are overspending, and then make the necessary cuts. By severing unhealthy areas of your own spending, you are preparing for the worst, and learning to create healthy financial goals and habits. If Mark and Donna had done more saving instead of more spending, they would never have been in a position of losing their home. Remember, it can happen to anyone, but fortune favors the prepared. Take stock of your budget and be prepared.
More from this Contributor:
My Biggest Money Saving Secrets
How I Live Frugally and Happily
Setting Realistic Financial Goals