If you think being in debt is fun, you’re the member of a very small minority. In fact, it might be a minority of one or just you. Most people who are struggling with debt don’t think it’s any fun at all. Being deeply in debt can cause stress, which, in turn, can actually cause physical issues such as heart and stomach problems, headaches, insomnia, constipation, bladder infections, arthritis and high blood pressure.
There’s a simple reason why you’re having a problem with debt. It’s because your spending exceeds your income. But the question is by how much? Are you spending 10% more than you earn? 20%? 30% or more? The only way that you can answer this question is by tracking your spending for at least 30 days. You will need to write down every penny you spend – for clothes, food, entertainment, dining out – everything. You could do this the old school way with a notebook and a pen or with one of the many smart phone apps now available. There are several good ones that are even free such Expenser, PocketMoney Lite and BudgetPulse.
Add up your spending and your income
Next, you will need to add up all of that spending and all of your income. This will answer the question as to how much more you’re spending than your income. Knowing this, you can then get started on doing something about it, which means making a budget.
Creating your budget
Since you’ve been spending more than you earn, your first step should be to reduce your spending until it’s less than your income. This will mean creating a budget and then determining where you can make some cuts and maybe even some sacrifices. For example, you may find that you need to cut your food costs by $100 or more a month as well as your spending on entertainment and eating out. We can’t tell you precisely where to make cuts but here’s an example of how you might budget by category.
- Savings 5 to 10%
- Debt repayment (loans) 5 to 10%
- Food 5 to 15%
- Utilities (heat, water, telephone, etc.) 5 to 10%
- Transportation (automobile, public
- transportation, taxis) 10 to 15%
- Clothing 2 to 7%
- Leisure and education 5 to 10%
- Housing (rent, mortgage, taxes,
- insurance) 25 to 35%
- Health (insurance, dentist, medication, etc.) 5 to 10%
- Personal 5 to 10%
Have an emergency fund
You must start saving a small amount each month as soon as possible to create an emergency fund. In fact, most experts feel that you should create an emergency fund before you start saving money for retirement or any other goal. Your goal should be to contribute 5% to 10% of your net monthly income until you have the equivalent of three months’ living expenses. The reason why this is important is because you will definitely have an emergency of some kind within the next one or two years. Your car could break down, your house could need emergency repairs or you could be hospitalized. If you don’t have an emergency fund, you would probably have to use a credit card, which means creating more debt rather than stopping it.
If you need help developing your budget, here’s some good advice from financial expert Dave Ramsey
How much do you owe?
If you haven’t done this already you need to add up your debts to determine how much you owe. The best way to do this is by using a spreadsheet program such as Excel or Google Docs. You should have four columns – one for the name of your creditors, one for your balances, one for the interest you’re paying on each debt and one for your due dates. The reason why it’s best to use a spreadsheet is that once you enter this information you can sort it several different ways. You could reorder your debts so that the one with the smallest balance is at the top or the one with the highest interest rate.
There are two schools of thought regarding the best way to pay down debt. The first is called snowballing and the second is creating a debt avalanche. What the snowball strategy calls for is concentrating all your resources on first paying off the debt with the highest interest rate. The idea behind this is that it saves you the most money to begin paying off the debt with the second highest interest rate and so forth. Conversely, the avalanche strategy calls for first doing everything you can to pay off the debt with the smallest balance. The experts who favor this approach believe that it works better because when you see you have been able to pay off one of your debts fairly quickly, you will stay motivated to continue paying off the rest. Whichever of these you choose, be sure to continue making the minimum monthly payments on all of your other debts.
The other side of the equation
If you find that it’s just not possible to cut your spending enough to both pay down debt and save money, you may have to work the other side of the equation, which means finding ways to increase your income. One simple way to do this is to get a second job.
Our economy has been rebounding and you should find it relatively easy to get part-time work in the hospitality or food service industry or some other retail area. You might not earn much more than $9 or $10 an hour but if you work an extra 20 hours a week this could be $600 or $700 a month. Since this is not income you would be using to cover your living expenses, you could apply all of it to paying down your debts. If you combine this with either the snowball or avalanche strategy, you could be debt free in just two or three years even if you owe $30,000 or more.
There is no time like the present
The most important thing is to begin taking action now. There’s the old question of, “How to you eat an elephant with the answer – one bite at a time.” The same is true of stopping debt. No matter how much you owe, you can eliminate it by starting with just one step today. You could begin tracking your expenses, make a list of your debts or just download a smart phone app for budgeting. It really doesn’t matter what you do so long as you do something.