Estimating One’s Budget to Avoid Payday Loans: Take Control Of Your Finances

Payday loans are great for receiving immediate cash needs, but unfortunately, they are fairly expensive. At a price of $30-$40 per $150 loaned, fees can accumulate fast, and with high probability, your loan could be outstanding at its due date leaving you with no other choice but to roll over your last loan. Since the amounts loaned are very minimal ($500 maximum), you can easily avoid the need for a cash advance with a little bit of budgeting in order to build up some savings.

The first step is to figure out how much actual income you receive per month after taxes. Include all sources of taxation: your job, alimony, investment income, interest. Pretty much, include anything that is regularly taxed. An unexpected profit can be a boost to your savings, but it isn’t much help when planning a budget and shouldn’t be considered part of the budget, since it is only a one time deal.

The next step to a great budget plan is to determine your monthly expenses. Again, include everything and anything that you consistently spend money on everything month or week: rent/mortgage, food, gas, car payments, insurance, contributions to your investments, donations to charity, any other regular expenses, and if you a routine kind of person, even that morning paper you buy everyday. Don’t include one time expenses here however. While they will have a large impact on your finances, one time expenditures should come out of your disposable or your overflow income.

Now that you have monthly income and expenses added up, subtract your expenses from your income. If you get a negative number, you’ve got a large problem and are going to have to consider rearranging your life style. You are spending more than you make. You need find ways to reduce your expenses. Cut back on trips to Starbucks or maybe buying that morning paper. Yes, you might have to even buy cheaper clothes. Do whatever it takes to get your expenses less then your income. So then if you do the same equation again and you get a positive number, you’re golden. This left over amount is your disposable income. However, if it’s just slightly positive, you might still want to still try to reduce your expenses a bit more in which this will give yourself a bit more of a cushion, just in case.

Let’s make an example. So suppose your income is $4000 per month, and your monthly expenses are $3500. This leaves you with $500 per month in disposable income. Many people are tempted to squander this money on unnecessary things like going to the movies or expensive dinners. That is not entirely wrong, but you should put some of it away in a savings account or possibly a mutual fund if you want to avoid future payday loans. Let’s say you put half of that disposable money ($250) away. That money will form your rainy day fund and if you never need to use it, it can go towards your retirement. After 4 months, you will have $1000 in this account - much more than the maximum amount of money you can receive from a payday loan. After a year, you will have $6000. If you increase your savings as your income increases rather than increasing your expenses, this fund will grow even faster larger and you will be able to handle bigger emergencies without having to resort to a payday loan.