I am a nerd, so I like to use Excel so it can do the math for me and I can eliminate the human error factor. But there is power in writing it down with a pen and paper. It makes it a bit more real. So if you like using spreadsheets to track your spending, write it on paper first. Seriously, that sounds weird, but it really does make a difference.
Make a column of your CURRENT income. I'm talking your monthly net income...what you bring home each month.
Make a column of your CURRENT bills.
Total them up.
If your income is higher than your bills, you are already in better shape than some, but you can still make adjustments to make the debt disappear faster.
If your expenses are higher than your bills, you know you have to make some cuts ASAP. We'll go through the cuts soon.
Now, prioritize your spending. For instance, tithing is at the top of our list. The same may be true for you or it may not (I will not go into why I think it should be here, but know that I do). Next should be your mortgage, your electricity/gas/water, groceries, gasoline, and so on. Credit card debt, no matter how high, should never be paid before the mortgage, the utilities, the car payments, food or gas. The reasoning? Sure you can hurt your credit by delaying payments, but you could lose your home, utilities and car by not paying the others. And those are important to the livelihood of your family, so these must be paid.
If you have any extra now, apply it to the credit card* that is at the top of your payment list while paying the minimums on the others. If you don't have enough, you certainly need more income AND big cuts. If you have just enough to make payments, you need to make cuts and possibly get more income. Don't believe me? Use this calculation to see what just making the minimum payments will do to what you owe and how long it will take you to pay it off. In fact, go do that calculation even if you do believe me. It's a great exercise and motivator! I do not want to be a slave to my debt that badly, do you?!
*Any extra you have should first be put into a baby emergency fund NOW to keep you from using your credit card on unexpected expenses (they WILL happen). Most people do $1000 or $1500. It sounds like a lot if you don't have it, but I promise, put off debt a couple of months to make this happen so you will not fall prey to using those credit cards as an emergency fund! Once this is fully funded, then commence the debt repayment. I promise, you'll be glad you did.
Now you have a plan. Know two things:
- It is not set in stone. After 1 or 2 months, you may find that you didn't budget enough in some areas or budgeted too much in others. Even after more than a year, we still adjust our budget frequently to work with current circumstances. You'll finally get a basic model that will work for you. In fact, go over and read this post from five cent nickel called Budgeting Mistakes That Everyone Has Made.
- You will fail. Seriously...we all go over budget some times. We (almost) all encounter some months when there is more month than money. If you reach this point from legitimate spending needs, dip into the emergency fund to fund it, replenish the emergency fund ASAP and then adjust your budget to plan for other incidents similar to that one. If it is just from poor spending, don't beat yourself up over it, but learn how not to let it happen again!
You're on the road now. It might be a bumpy one, but the destination is so worth it! And you will learn so much about yourself along the way!
Photo credit: lusi