Credit Repair and Budgeting: Three Steps

Resource allocation is the cornerstone of good budgeting. Understanding how and when to spend your money is the best way to build a stable lifestyle. These goals are especially important when credit repair is added to the mix. The ability to pay your bills on time, establish an emergency fund, and reduce debt are all credit score boosters, ones that come easily with a wise budget in your arsenal. Focus on credit repair and simplify your life by adopting the financial tips below.

• Tip #1: Overestimate.

Budgeting requires a review of the facts. Begin by gathering three months’ worth of bank statements and bills. Make a list of your monthly expenses and calculate the average of each. Consider the following example:

Ted is trying to decide how much cash to allocate for electricity each month. He reviews a list of his recent bills:

o February: 102.66
o March: $91.45
o April: $87.92

Based on these numbers, Ted determines that he spends an average of $94.00 per month on electricity.

Just as Ted learned, the “average” cost is not always the actual cost. Err on the side of caution when budgeting for variable expenses and add 15 percent to your estimate. In Ted’s case, he should allocate at least $108.00 per month for electricity. This strategy provides a cushion for expenses that rise and fall based on use, allowing you enough cash to cover the bill and keep your credit score in fighting condition.

• Tip #2: Separate fixed and variable expenses.

The components of a budget fall into two categories: fixed and variable. Fixed expenses include things like rent, car payments, insurance, etc. Variable expenses refer to utility costs, phone bills, fuel costs, etc. Recognizing the demands of each category is essential to maintaining a positive balance in your bank account. Simplify things by assigning these expenses to separate bank accounts. For example, use Bank Account A to pay for all fixed expenses and Bank Account B to cover variable costs. Ask your employer to split your paycheck between these accounts on payday. Consider Jim’s situation:

Jim earns a net income of $4,500 per month. His mortgage, car payments, student loans, and other fixed expenses total $2,200 per month. His utilities, entertainment expenses, and food costs average $1,050 per month. Jim allocates $2,200 into Bank Account A and $1,210 (a 15 percent cushion) to Bank Account B. At the end of the month, he uses the remaining $1,100 in income to invest in retirement savings and his liquid emergency fund.

Take a lesson from Jim and segregate your expenses accordingly. Avoiding the need for credit repair is accomplished easily by understanding how your money is spent and making room for savings.

• Tip #3: Trim the fat.

Examining your spending habits is likely to raise some red flags. Do I really spend $1,200 a year on cable? I spent way too much on shopping and dining out last month. I can’t believe my electric bills are so high! –These are just a few of the thoughts that may be swirling in your head. Why redirect some of that hard-earned cash to credit repair? Consider cutting back monthly expenses and putting your resources to better use. For example, reduce your $100 cable bill to $7.99 by switching to Netflix. Use the $92.00 in savings to pay off credit card debt and reduce your credit utilization ratio. Whatever your strategy, embrace actions that will support both financial health and positive credit repair. Focus on financial health by reducing the bottom line.