“Always pay; for first and last you must pay your entire debt.” – Ralph Waldo Emerson
You might think, “That was easy for Emerson to say; he had a Harvard degree and a sizeable inheritance.” It’s true that staying out of debt is easier for some than for others. Many Americans struggle every month to find enough money to meet current expenses as well as battle their existing debt. If you have been trying to get out from under the burden of debt and are frustrated by your lack of progress, don’t despair. There are some simple steps you can take to make this seemingly insurmountable task more manageable.
You may be tired of us saying this, but step one is always to create a budget. You can only control what you understand; in order to take control of your finances, you must take the time to understand them.
Track your spending.
You may think that you already have a good idea of your expenses. Your largest expenses, such as your rent or mortgage payment, utility bills, car payment, and other loan payments are probably pretty stable. Chances are, however, it is the small, incidental things that can really make a difference in your spending and how much you have left over at the end of the month. Take the time to track your actual spending down to the penny for at least a month so you know exactly where your money goes.
Categorize your expenditures.
Once you have tracked all of your expenditures for at least a month, place them into categories according to priority. In the first category, list expenditures that are absolutely necessary. First priority items would be things like housing costs, food, medicine, basic utilities, and necessary transportation costs.
The second category should contain things that you need but can put off for a while. This might include clothing purchases, cosmetic home repairs, or replacing an old appliance or vehicle.
In the third category, list things you like to have but do not absolutely need. Examples may include cable or satellite TV, going out for dinner or drinks, salon or gym visits, travel, or a more expensive cell phone or Internet plan than you really need.
Separating your spending into categories such as these will help you pinpoint exactly how much money you really need to live and how much you can conceivably cut from your monthly spending.
Often, people get into the habit of looking at revolving debt as something they pay down if they happen to have money left over for it. Many go for long stretches making only the minimum payment on their credit cards because they don’t feel they have the “extra” money to pay anymore. This approach, however, makes it very difficult to ever get out of debt. To make significant progress, you must make paying down the principal on your debts a priority. One way to help yourself to do this is to set up automatic payments for your credit cards. Decide ahead of time how much you can reasonably allocate toward paying down debt. Then set up the payment to come out of your bank account automatically. Since you have already earmarked this amount, you are less likely to think of it as part of the funds you have available for discretionary spending.
If you don’t yet have a system for keeping track of all of your bills, debts, and associated documents, put one in place. Whether it is a paper filing system, accounting software, spreadsheets, online banking, or something else that works for you, it is important to have ready access to your financial information. Again, you can only control what you understand, so do what you can to understand your obligations to your various creditors.
One reason this is important is to get a clear picture of the relative costs of your debts. If you have debts that have gone into default, then you may be racking up substantial late fees and increased interest rates on those accounts. The most effective way to reduce debt is to pay the most costly debts first. When those are out of the way, the debts with lower fees and interest rates can be paid down much more quickly.
Another reason organization is crucial is that it allows you to stay on top of your obligations. Failing to organize your finances makes it easy to miss payments, incur late fees, and drive up interest rates, which ends up costing you more money and extending the time it takes to become debt-free.
Often, a simple call to a credit card company can get you reduced interest rates or a waiver of certain fees. When contacting your credit card company, remember:
At Boelman Shaw, we can help you get your finances on track with comprehensive financial services, including professional financial planning advice, savings and investment solutions, and tax planning. If you are in the Des Moines area, contact us today to set up your free financial consultation.
Tax and accounting services provided through Boelman Shaw & Company, LLC. Advisory services provided through BSC Capital Partners, LLC a state of Iowa registered investment advisor.