(1 votes, average: 5 out of 5)
Loading ...Keeping detailed records of your spending for one month will help you see where you may be frittering away your money. It won’t, however, provide you with all the information you need to develop a realistic spending plan. You may have quarterly tax or insurance payments, for example, that didn’t show up in last month’s spending.
To get a better idea of what’s realistic for each spending category, pull out old check registers, receipts, and credit card statements from last year. Tax records can also be useful. Try to figure out approximately how much you spent monthly in each of your budget categories. Don’t be judgmental here; simply total the amounts you spent. (It’s likely you will find that some of your money just “disappeared.” Don’t worry about that money. Just document as much as you can.)
Now, the most difficult part: deciding how you will spend your money each month. Examine your past spending habits, and try to develop a plan that allows you to pay your bills and have some money left over for fun.
How much you choose to spend in each of your budget categories depends on what you need and how you choose to spend your money. But keep in mind that if any expense really seems out of whack or is eating up a big chunk of cash each month, it may need to be reduced. One of the most common traps is a huge car payment for an expensive new car. When you add on the insurance and gas and everything else it takes to maintain it, a car can end up keeping you from getting ahead.
Remember: The amounts you allot for each category cannot total more than your income for the month, or you are going to have to borrow to make up the difference! It’s likely that, in the past, the amounts spent on each category did add up to more than your monthly income. That’s how you got into debt.
It may be helpful to start at the top: First deduct from your total monthly spending allowance enough money to cover those bills you must pay. Next, allot money for essential purchases, including gas, insurance, and food. Then figure in discretionary spending that you don’t want to sacrifice: music lessons for the kids, an evening out a couple of times a month, or health-club dues, for example. Divvy up what’s left over among the remaining categories.
As you design your plan, take a careful look at how you spent your money over the past month to see if there are any areas where you can make some relatively painless changes. Most people are genuinely surprised to find out how much money they spend frivolously. For example:
• A cup of coffee every morning at $1.25 a day: over $325 a year.
• A soda at lunch at 99 cents a day: $257 a year.
• Renting two home videos a week at $4 each: $416 a year.
• Five magazine subscriptions at $15 each: $75 a year.
• Deli lunch purchased on workdays at $6 each: $1,560 a year.
Are there some areas where you can cut back? You will have to make some sacrifices and changes to get out of debt. The reward—real financial freedom from bills—is worth it.
Make the tough choices first. Then start looking at smaller changes that may free up extra money.
If you are especially frugal when figuring your spending allowances, you may find that the amounts you allocated to each category add up to less than your income. If so, you may want to add to the amount you put toward loan payments. The more you pay on your credit cards and loans each month, the faster you can pay them off.
Don’t starve yourself. When you’re dieting to lose weight, you won’t be successful if you cut out every food you enjoy. The same thing is true of your debt diet: If you eliminate every luxury, your diet isn’t going to last very long.
Make moderate, not drastic changes if you can afford to. If you have been eating lunch out every day, for example, resolve that three days a week you will bring your lunch, and then do it. Instead of giving up your morning cup of coffee, take a small, inexpensive coffee pot to work and brew your own. Keep your goal of becoming debt-free in the front of your mind, and soon those little things you “had to have” before your debt diet will become less and less important.
If you’re developing a spending plan for your entire family, you have to consider their wants and needs as well. It’s very important to give each member of the family an “allowance” (even if it’s small) that they can spend as they choose. Then, give them the freedom to spend their allowance as they please, with no unreasonable criticism from you.
Before you embark on your new debt diet, you’ll have to enlist the support of your family and close friends. If you usually eat lunch out with your coworkers, they may feel slighted when you start brown-bagging it and staying in. Likewise, if you’re used to handing money over to the kids for everything they want, they may not understand why Mom and Dad are suddenly tightening the purse strings. Or if your spouse and you have different financial priorities, you could find yourself fighting constantly about money problems. Open and honest communication can help you work together to improve your financial situation.