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If you’ve followed the first two steps for getting out of debt you now have all the information you need. You know whom you owe, how much you owe and how much interest you're paying. You should also have learned your soft spots or those areas where you could cut back on your spending. But before you decide where to make those cuts, hold a family team meeting. You’ll get better results when this is a joint effort. If you have children you should even involve them in tracking your spending and creating ideas for trimming expenses. As a general rule, reducing your spending is usually better than cutting out categories. This is because it's practically pointless to come up with a budget if you can't stick to it. Of course, you don't have to tell your kids every little detail of how you stand financially but it's important that they understand why it is that you need to make changes and what this will require.
While this may not be true for you, most people who have chosen to cut back on their spending have found it's easiest to do this in categories like clothing, dining out, entertainment and groceries. Your “team” might even be able to find ways to cut back on "fixed" expenses such as automobile insurance, utilities and transportation.
Building a better budget
If you don't already have a budget it’s important that you create one. Whether you use Quicken, Mint.com or some other app it's critical that you do this in order to get a fix on your finances. This can also help you stop wasting money on things such as overdraft penalties and late fees. Plus, it will enable you to eventually reach the point where you’re spending less money than you earn and will have money to put into savings. Assuming that you've already added up your income and tracked your monthly spending, here are four other steps you could use to build your budget.
Remember the little things. It's easy to group your spending into the big categories such as food or transportation but you may be spending a lot that's hard to group into major categories. This could be money you withdraw from an ATM and use for your day-to-day needs. But it's critical to track where that cash is going. What this may require is for you to keep a journal of your cash expenditures for the next four weeks. You would then be able to use that information to extrapolate the amount of cash you're going to need for a typical month and then build this into your budget.
Expect unexpected expenses. There are unexpected expenses that you should expect or they can totally derail your budget. Unexpected expenses you should expect are things such as holiday gifts for your kids’ teachers or for your trash pickup guy. Or how about getting hit up with requests that you buy stuff for fundraisers or chip in for a birthday cake for a fellow employee? You know these are coming so set aside enough money to handle these recurring one-off expenses. Then be sure to include them in your budget.
Watch out for items you could cut. As noted above, you should by now have been able to find places we you can reduce the fat. You might be able to cut membership in an expensive gym, cancel a monthly subscription to something or slash those premium cable channels. You should always wait until things go on sale to buy them. You should turn down your thermostat in cold weather and up in summer. Also, when you get your car paid off, don't immediately trade it in for a new one.
Get some high tech help. As mentioned above, personal finance program such as Quicken or Mint offer built-in tools to help you develop a budget. With almost all of these services, whenever you make a deposit, pay a credit card bill, write a check or send off an electronic payment, you will be asked to assign it to a specific category. If you bank online as we do, you should be able to download those payments and deposits directly from your bank. This would save you from having to enter them by hand.
Getting out of debt is certainly not as easy as getting into debt but it's doable. We know of people who put together debt management plans that helped them become debt-free in three years or less even though they owed more than $20,000. If you follow the information in this article, there is no reason that you also couldn't be debt-free in three years or less. And just think how good it would feel to be able to open the day's mail or to answer the phone without that awful feeling in the pit of your stomach.