Income and expenses must be controlled in such a way that the expenses never exceed the
income. Budgeting allows a person to allocate portions of their income to cover their
expenses while considering the bigger picture.
Expenses can be divided into three general groups: necessary living expenses, luxury
expenses, and loan payments. Loan payments are not an expense in the ordinary sense because
they represent money already spent that has to be repaid, usually at an additional cost of
interest payments. For those with limited income, loans may seem desirable to make
purchases that the income cannot afford. But these loans grow with interest and must be
paid in a timely manner. If they are not, creditors may take your home, your car, other
possessions, and invariably lower your credit rating, which may hinder obtaining future
loans.
This is where debt management is important. If done properly, debt will not exceed a
person's budget. Avoiding overspending is the first goal, followed by building savings to
handle medical or other personal emergencies. Once a budget is created that identifies and
allocates income toward basic living expenses, debt must be carefully approached. To avoid
interest payments and possible overdue fines, all outstanding debts should be paid in full
every month. If this is not possible, pay off the debt with the highest interest rate
first, then go after the next highest interest rate, etc.
If debt consolidation or refinancing is an option,
use it wisely. Pay off the debts without creating new debts elsewhere. There are credit
counseling services and financial institutions that are available to help structure
personal budgets. You might attempt to contact your creditors and request an official
payment postponement or more favorable repayment options, even if just on a temporary
basis. If you do not wish to try it yourself, some services provide such debt negotiation
for a fee. Voluntary forfeiture of property or filing for bankruptcy should only be used as
a last resort, as these actions will adversely affect your credit rating for several
