All financial experts agree that the first step in managing debt is understanding how, where and why you spend the money the enters your life. Only with a solid understanding and appreciation of how much money enters your life and how much money leaves it can anyone begin to effectively manage their debt load and their future financial security.
Most people fall into the same trap. They simply don't understand "where it all goes". Everyone typically has some bills that must be paid monthly. These may include rent, mortgage payments, car loans, telephone bills, and so on. The first step in developing a strategy to help manage debt is understand what your costs actually are every month.
The first step involves carefully listing bills due each month. This
includes any monthly loan payments you are required to make
(preferably a percentage of which goes to the loan principle, not
just the monthly minimum to service interest). If your bills add up
to more money than you make in a month, you have a serious problem.
Individuals in this situation should immediately sit down with a
financial expert to develop a professional money and debt management
plan.
Many people, after listing their monthly expenses, realize that they
spend a lot more money than they thought they did, and often don't
know what they've spent it on. Using bank statements, credit card
statements, and other records, a careful analysis will reveal on
what and where you have spent your money. This is a critical step.
Completing this step helps to reveal not only where your money is
going, but how you can stem the tide of your spending. Every dime
you don't spend can then go toward paying down debt.
Many people are scared to learn the truth about their money and
their spending. The important thing to realize is that you are in
control of your money, not the other way around. Being unable to or
unwilling to face the truth about spending and saving leaves people
paralyzed and out of control. Inevitably, they spend more money
servicing debt instead of building toward a more positive financial
future.
Steps to a Successful Debt Management Strategy
1) List all monthly bills and expenses
2) Subtract this total from your monthly income
3) For a one month period, keep of list of EVERY penny that leaves
your life. Whether this involves a $1.00 donation, or an extra
dinner out, track it. Use bank statements and credit card statements
to aid you in this step.
4) Closely assess the results of step #3. Could you have spent less?
Why did you buy this item, or spend so much eating out? How much
money would you have saved if you hadn't spent that money?
5) Decide where and how you will change your spending, and set a
goal for yourself about the money that will be saved by the behavior
change.
6) List all outstanding loans and debts. If any or many of these are
high interest loans, such as credit card debt, visit your local bank
and discuss a lower interest loan to pay down all high interest
debts.
7) Plan where to put the money saved. Make a list. Always start by
paying down all high interest debts, for example credit card debts,
and begin working down the list.
8) Do not assume ANY new debt.
What people find when they successfully work through these steps is
that they have the power to save. The control is theirs - the
choices are theirs. This is an extremely powerful outcome of working
through these steps - one that can literally change your financial
future for your lifetime.
If you cannot successfully achieve every step, talk to a financial
counselor or advisor.
Debt Management Resources:
MSN Money offers a step by step guide to managing personal debt. Practical Money Skills provides useful debt management calculators.
