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Learn how to prepare & manage your budget so you can avoid the need for payday loans.

While payday loans can be used to meet your immediate cash needs, they are expensive. At $20-$30 per $100 loaned, the fees can add up quickly, especially if you have to roll over the loan once it reaches its due date. Since the amounts loaned are so small ($500 maximum), you can avoid the need for a payday loan with a little bit of budgeting in order to build up some savings.

The first step is to determine how much income you receive per month after taxes. Include all sources: your job, alimony, investment income, interest. Basically, include anything that is regular. A one time windfall can be a boost to your savings, but it isn’t much help when planning a budget.

The next step is to determine your monthly expenses. Again, include everything: rent/mortgage, food, gas, car payments, insurance, contributions to your investments, donations to charity, and any other regular expenses. Don’t include one time expenses here either. While they can have a significant impact on your finances, one time expenses should come out of your disposable income.

Now that you have monthly income and expenses, subtract your expenses from your income. If you get a negative number, you’ve got a problem. You are spending more than you make. Find ways to reduce your expenses. Cut back on trips to Starbucks. Give less to charity. Buy cheaper clothes. Do whatever it takes to get your expenses in line with your income. If you get a positive number, you’re good to go. This amount is your disposable income. However, if it’s just barely positive, you might still want to reduce your expenses a bit to give yourself a bit more of a cushion.

Let’s take an example. Suppose your income is $3000 per month, and your expenses are $2700. So you’ve got $300 per month in disposable income. Many people would be tempted to spend this money on things like going to the movies or nice dinners out. You can still do that, but you should put some of it away in a savings account if you want to avoid a payday loan. Let’s say you put half of that money ($150) 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 $600 in this account – more than the maximum payday loan you can get. After a year, you will have $1800. If you increase your savings as your income increases rather than increasing your expenses, this fund will grow even faster and you will be able to handle bigger emergencies without having to resort to a payday loan.

It’s not difficult to come up with a budget that will let you avoid payday loans – it only takes a little bit of arithmetic. The hard part is resolving to actually make a budget and then stick to it.