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In the world of financial fitness, getting out of debt is perhaps the ultimate challenge—a marathon of money management requiring discipline, skill, and endurance. But just like getting in shape physically, the rewards—more money, less stress, and great financial habits—are tremendous.
If you don’t owe a lot of money, you may want to go for the fast burn and just get rid of your bills as quickly as you can. But if you’re like most people, and owe a bundle, you’re going to have to dig your way out the slow and steady way. If you try to go at it too fast and too hard, you’ll burn out long before the bills are retired.
Either way, you’re going to have to face the facts: Getting out of debt means you’re going to have to find money somewhere to pay what you owe.
Figure Out How You Got Where You Are
You’ll never be able to get out of debt until you understand how you got into debt in the first place. Sometimes it’s truly something extraordinary that sends people’s finances into a tail-spin: unexpected medical bills, a new child with special needs, a messy divorce, or a failed business. But often it’s more like the leak that never gets fixed—eventually those little drips of money turn into a waterfall that you can’t control.
What is it that’s really keeping you from getting out of debt? Are your finances so disorganized you can’t keep on top of them? Are you forking over cash to the kids every time you turn around? Are you living in a house that’s too expensive, or driving a set of wheels (or two or three) that cost a small fortune? Do you and your spouse have no clue how much the other is spending? Are you toiling in a job that doesn’t pay enough? Be honest here! The truth will catch up with you sooner or later; you might as well ‘fess up with yourself now.
The purpose of answering these questions is not to assign blame, point fingers, or rub your own nose in the sand. It is important because, as Steve Rhode of Myvesta.org says, the debt itself is rarely the problem. Chronic or excessive debt is usually the symptom of something else. Those “something else’s” could be:
- Self-esteem issues: a need to “keep up appearances” or shop to feel better.
- Addiction: For some people spending money can create a “high” in the same way using drugs or alcohol does.
- Underearning: staying in a low-paying job, or failing to get the skills or credentials to move up; may be tied in with self-esteem.
- Money fights: One spouse or partner may be using or abusing money as a source of power in the relationship.
- Gambling: not just in a casino, but with business “opportunities” or get-rich-quick schemes.
- Denial; an unwillingness to face money facts head-on.
- Unconscious Living: living only for today, leaving the future at risk.
All of these problems can be addressed, but only when they are recognized first.
Mend the Holes in Your Pockets
How many times have you taken out $50 at the ATM machine, only to discover a day later that you’ve spent it all—but you don’t remember where? Most people have a rough idea of how they spend most of their paycheck, on things like the mortgage or rent, the car payment, and other bills. But they lose track of where all the rest of the money goes.
To get a clear picture of where and how you use your money, you must write down every penny you spend. For the next month, that is exactly what you will do. I’ll admit, this is a pretty tedious exercise. The first time I tried it, it took four separate attempts before I actually followed through for a whole month. I tried it again recently after a change in my financial status, and again, it took two months before I actually stayed with it for a month.
There are several ways to keep track of your spending. If you have a computer at home, you can use a personal finance program like Quicken, which allows you to create charts and graphs that show you how you are using your money. Just be sure you enter every penny—not just what you spent with checks and credit cards.
If you don’t have a computer or don’t want to use it, you have a couple of other options. One is to get an accountant’s notebook that has seven to ten columns across the top. Across these columns list your basic budget categories. For many people, these broad categories will be:
- Home: rent or mortgage, utilities (phone, electric, heat), home maintenance costs, gardening, and upkeep
- Food: food you eat at home or during work hours. Dining out in the evening should probably be included under “entertainment” or maybe “business.”
- Transportation: subway or bus fares, car payments, car insurance, taxes and tags, gasoline, parking, tolls, and maintenance
- Medical expenses: doctor bills, dentist bills, prescription medications, eyeglasses, contact lenses and solutions, health club memberships
- Clothing and personal care: all clothing purchases, including pantyhose, shoes, and jewelry; cosmetics, shampoo, toiletries, and haircuts
- Entertainment/Recreation: movies, videotape rentals, sports fees, music lessons, dining out, vacations
- Loan payments: credit cards, personal lines of credit, or other loans, except the mortgage and car loan
- Miscellaneous or other categories: You can create your own categories, or just have a “catch-all” category for anything that doesn’t fit above.
These eight basic categories should cover most expenses, but you may find there are other categories you want to add. Don’t worry about getting too detailed, though. The idea is just to get a basic idea of your spending patterns.
Now, for the next month, keep track of every penny you spend. If you decide to record your expenses in an accountant’s notebook, you may find it necessary to carry a tiny notebook in your wallet or purse so you can record purchases as you make them. Just don’t forget to transfer those purchases to your accountant’s notebook when you get home.