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Have you ever stopped to think what an out-of-control financial issue could do to your life? You need to do this because a serious financial problem could totally disrupt your life, leaving you in a mess that could take years to fix.
Here comes that dreaded B word – budget. If you don’t have one you need to get busy and start creating one. There are two ways to do this – the easy and the hard way. The hard way is to keep all your receipts for 30 days. Then get out your checking account statement. Make a list of all your spending for that month and divide into two columns - “fixed expenses” and “variable” expenses. The fixed ones are those we discussed in an earlier paragraph – your rent or mortgage payment, auto loan payment, credit card payments and so on. Your variable expenses are everything else, including food, entertainment, transportation, clothing, eating out, your utility bill, etc.
Now, add up the two numbers. Can you now see why you’ re having a problem with debt? It’s probably because your expenses outweigh your total income – and maybe by a substantial amount.
Use an app
The easier way to create a budget is to get an app like Mint.com. It has two great features. First, it’s free. And second, it’s easy to use.
To create an account in Mint all you do is type in the numbers of your checking and savings accounts, credit cards, loans and investments (if appropriate). Mint will then gather up all your information and present it to you in one simple, easy-to-understand picture. Mint will know about your past spending because it will have the information from your credit cards and checking account(s). Mint will even organize your spending into categories. You create a budget by setting spending limits in each category. Any time you exceed your spending limit in a category, Mint will send you an alert via email.
Why easier is better
The problem with the “harder” way to budget is that it can be tough to track your spending accurately so you may end up overspending. By the time you sit down to write out what you spent that day you could think you had spent $80 on groceries when you really spent $95. Ditto how much you spent for lunch or hanging out with friends after work. You might even forget to write down your spending for several days, which could tear your budget to shreds.
In comparison if you use an app such as Mint.com or Page Once you will have an accurate record of your spending and will know exactly where you need to make cuts.
Get out an axe
If you truly want to get your debt under control you’ll need to take an axe to your spending. Your goal should be to reduce your spending to the point where it’s at least 20% less than your income. Most people find that food, clothing and entertainment are the easiest categories to cut back on. You will need to continue tracking your spending – manually or with Mint, Mvelopes or You Need A Budget (YNAB) so you will know how you’re doing vs. your goals.
Use a Snowball
One good way to get your debts under control and paid off is by using the "snowball" strategy. This is where you focus on paying off the debt that has the lowest balance first while continuing to make the minimum payments on your other debts. Once you have that debt paid off, you will have more money available to begin paying off the debt with the second lowest balance and so on. This strategy was developed by the personal finances expert Dave Ramsey and has helped thousands of people become debt free. Here’s a short video where Dave explains more about debt and snowballing.
As an alternate to this you could begin by paying off the debt that has the highest interest rate first. There are other experts who believe this is a better alternative because it's the debt that's costing you the most.