If you’re reading this then you’re heading in the right direction and taking ACTION! The hardest part of anything is starting. Once you start do not get distracted by anything. Lock yourself in a room if you have to.
So you’ve acknowledged that you are in debt. Great, now is the time take back what is yours! Quit being a slave and break the shackles of debt.
To dig yourself out of the hole you are in, sit down right now and follow these steps :
1. Assess your situation: Dig up all of your accounts and start laying the foundation to find your net worth. You need to determine what you have and what you owe
- Add up all your assets (bank accounts, retirement accounts, etc). Log into all of your accounts and figure out what you have.
- Add up all of your liabilities (credit cards, student loans, car loans, personal loans, boat loans, what you owe Grandma, etc). This is the hard part. Finding out how much you owe is the gut punching reality check.
- Take your assets minus liabilities to get your Net Worth. Now you know what you are worth on paper.
2. Figure out where all the money went: Take all of your accounts and throw them into a budgeting tool such as Mint or YNAB. From here you will easily find out what you are spending your money on. You may need to categorize the transactions. There’s an old proverb that states, “what gets measured gets managed.”
Use your budgeting tool to see what you have spent per month in the past few months to see where your money is going. I like to keep this simple into a few large groups:
- Housing: rent, mortgage, utilities, maintenance, insurance
- Food: groceries, restaurants, coffee shops, fast food, alcohol & bars
- Transportation: auto loan, service & maintenance, fuel
- Bills – reoccurring: cable, cell phone, gym membership, magazine subscriptions, etc.
- Travel: everything you spent money on for travel from air fare to motels
- Social Activities: concerts, sporting events, fun with friends
- Miscellaneous: clothing, gifts, one time things. You can break this group down further as you progress but keeping it simple from the start is key
- Debt: student loans, personal loans, credit cards. This group should not be part of your budget. When paying down debt list the minimum payments required and the total amount owed.
Here’s an example of a monthly budget (a terrible one):
- Income: $5,000
- Housing: $1,200
- Food: $1,000
- Transportation $1,000
- Bills: $400
- Travel: $500
- Miscellaneous: $750
- Debt payments (minimum): $500
- Total debt: $5,000 (high interest credit card)
Money left over: -$350 Whoops! I am in debt and digging a deeper hole! I can’t make the minimum payments! WAH WAHHH!!
With this example in place you now have a spending basis and a budget to build from which brings us to the important part
3. Cut expenses mercilessly from your budget: You are in debt because you do not follow the rule, “spend less than you earn.” All wealthy individuals live by this rule. Like the example above you cannot sustain this lifestyle and need to cut the fat.
Let’s take a look at few things we can cut to improve the budget above:
- Luxury apartment? Move to a smaller apartment, downsize and reduce your payment, or get a roommate.
- Eating out everyday? Learn to cook and brown bag it. Limit your trips to coffee shop.
- Slick new full size gas guzzling SUV with the navigation and 20″ wheels? Time to trade it in for a smaller more economical car.
- All access cable bill? Get rid of it now!
- Fancy unlimited cell phone plan? Head over to Republic Wireless to pay a fraction.
- Ultimate Gym membership that you do not use? You should maintain a healthy life and exercise. If you are not using it then cut the expense and do some home workouts or get a cheaper membership.
You need to cut until it hurts and cut a little more. Lets be honest here – this will suck. It will royally suck. Sacrifice is a word thrown around and is associated with negativity. In baseball they a play called a “sacrificial hit” where the batter takes an out to advance the runners on base. Think of budgeting as advancing your runners on base – or in this case YOUR MONEY. You want to advance and build up your money but to do that you need to sacrifice.
Until you can manage to spend less than you earn you will always be in debt and NEVER succeed.
With some of the fat trimmed out from your spending you now have a working budget you need to live by which should look something like this here (which is still quote a healthy budget and there is more room for improvement):
- Income: $5,000
- Housing: $800 (non luxury apartment)
- Food: $600 (laying off the work luncheons and restaurants)
- Transportation $500 (riding a slick hatchback)
- Bills: $200 (new phone plan, no cable package)
- Travel: $500
- Miscellaneous: $750
- Debt payments (minimum): $500
- Total debt: $5,000 (high interest credit card)
Money left over AFTER minimum debt payments: +$1,150
Notice we did not cut everything out, but making just a few changes made a world of a difference. The more you cut the more you may have to sacrifice but the more you can save. You need to prioritize what each item on your budget is worth to you and if it is something you can give up. You want to spend the least amount of money and keep the largest portion of your paycheck (we’ll get into investing later on).
This leads us to the final step:
4. Pay off your high interest debt: With a new budget and excess savings, use your excess money to pay down your high interest debts first and any other debts. In the example budget there is $1,150 extra left over. Put this money towards the $5,000 debt and in less than 5 months the debt is gone!
There you have it. A budget where you spend less than you earn and can begin to build the path towards wealth! Figuring out what you have, creating a budget, reducing your expenses, and paying off your high interest debt are the steps you need to take. With the money saved each month you can now breathe a little easier and look forward to growing your money instead of paying it to someone else!
How have you dug yourself out of debt?
