Budgeting is usually a good idea as it might help you to keep a record of the way you use your money. A budget, which is done well, should be able to help you understand how your money is spent and should also help you make decisions about where and how to cut costs. However, before getting started on a budget, one should also understand how budgeting can harm you.

Budgeting can be Bad when Prepared the Wrong Way

Most people go about budgeting in a very simple way. They allot a certain amount of money for various expenses such as gas, food, clothing, and medicine. Everything goes fine as long as the prices do not change and unexpected expenses do not crop up. For example, when the price of milk goes up, how can one balance the budget?

Does one simply buy less milk or cut down on other expenses so that they can buy the same quantity of milk for a higher rate? Perhaps they might hit upon the idea of cutting down on gas money but that would mean they may not be able to go to work by car every day.

A budget made this way will never work well and will likely end up getting you into worse financial shape because your ends will never meet. Others love the idea of jotting down their spending in a small diary and considering it a budget, and while this is good to keep a record, it is insufficient data for a budget. What good would it do to record the expenses when you have no idea how to use your money wisely?

Jotting down expenses and having a rough budget on paper can mean you might miss important expenses and may not cover unexpected ones. It is better to get your monthly bills in order and make sure you get them paid on time.

Budgeting does not equal Financial Intelligence

Though budgeting may help you become more intelligent about your income and expenditures, unless you are using your common sense and paying your bills on time, it won’t really help you. These are tips you should master before trying to adhere to a budget.

  • Use your credit card only when necessary. And remember not using your credit card at all is as unwise as over-using it and then not paying the credit card bill on time.
  • A budget won’t help you if your debts are out of control so begin paying down your debts and living a frugal life and saving money.
  • Preview your credit score and report regularly, making sure that everything reported is accurate and there are no fraudulent charges on your account.
  • Make sure that you have a healthy credit score by paying bills on time and in full. If you can’t pay in full, at least pay more than the minimum due.
  • Instead of blindly following others or looking for easy solutions, you must educate yourself when it comes to finances.

Budgeting without DTI consideration is hazardous

Budgeting can be hazardous when the debt to income ratio (DTI) is not taken into account. DTI, simply is your monthly debt payments divided by your monthly income (gross amount). The lower the ratio, the better it is for your credit report and score. Ideally the ratio should be well below 10% of your monthly income and if you cannot manage that, try to bring it down to at least 30% by paying more than the minimum amount every month.

Preview your credit score at creditreport.com to determine that you are well within your credit limits and make sure that your DTI is no more than 30%. This is the best step to take before every attempting to create a budget and adhere to it.

There is more to budgeting than just maintaining an income column and an expense column and trying to balance the two. You have to take into account all the variables and should be aware of your own shortcomings regarding budgeting.

If your finances are out of control, it is best to pay down debt and regain control of your finances while improving your credit report and score and then maybe, just maybe you’ll be ready for some tips on budgeting.

Joy Mali is an active finance blogger who is fond of sharing interesting finance related articles to encourage people to manage and protect their finances.