The golden rule of finance is to spend less than you earn. Well, yeah! But how many of us does that really apply to? The ones just starting out on their own, without the burdens of debt.
Most of us, however, skipped straight to the “real world”, accumulating debt in the form of student loans, car loans, and credit cards. Credit was easy to get, and the “pay for it later” mentality prevailed. So what do we do now? The damage is done and the debt is mountainous, we must take action!
Step 1. Make yourself a budget. I’m a budget Nazi. There are many ways to accomplish this task, but you must at the very least, write something down. I use the word budget, but this is really just getting everything down on paper or spreadsheet. Write down what you think you are paying on a monthly basis. This will take some time, don’t get discouraged if you can’t find the last water bill, just estimate for now. Did you notice there’s a gap between income and expenses?
Step. 2 Keep track of every penny you spend for the next month. Whether you pay cash, check, debit or credit card, get yourself a little notebook and write it down. Yes, you will look like a nerd, just do it. I guarantee you, you spend more than you think you do.
Step 3. Go back to your budget and fill in the real numbers. This is going to be painful, but it will answer the question of why your credit card balance never seems to go down, and why you never have anything leftover to put into savings like you keep meaning to.
Step 4. Get Real! You know something has to change, that’s why you’re here. Look over your budget and see what you can change right now to put you on the path to financial freedom. But for goodness sake, be realistic. The financial wizards love to use the example of cutting out that morning coffee at Starbucks. Sure cutting out your $3/day habit can save you $15 a week but is that going to make a big enough dent? Don’t deprive yourself of things you enjoy, rather, pare it down a bit. Meanwhile, tackle something big enough to give you the boost you need to jump start a new, leaner budget. Remember that money is largely psychological, use this to your advantage. Make a game out of it!
Step 5. Revise and memorize your budget. By this point, you know where all your money is going. Now its time to make a plan of action. Whether you want to be debt free, or have enough stashed away to retire at 50, you’re going to need a map for your journey.
What would you like to hear about next? How to make a budget or cutting expenses?