Manage Your Finances and Get Out of Debt

Take it from a man who has been at rock bottom before. It is incredibly stressful to have your money literally taken out of your hand as soon as you get it. I finally was pushed to the point that I absolutely had to make a change or my family would be torn apart. So I jumped in with both feet. Now, I am at peace with my money. Peace comes from the fact that my money does what it is supposed to do.

Before you start, I want to introduce you to a few programs that helped me early on.

mvelopes.com - Offers a free 30 day trial of their personal finance system that turns traditional paper envelope system into an electronic version. Very helpful for tracking your spending.

Microsoft Money Essentials - Another good program without spending a fortune to manage your personal finances and keep your bill paid online.

The first thing any of us should do before any life-changing experience is pray about it. Thou doest not hath to speaketh unto the Lord as if you were King James thyself. All you need to do is ask for His guidance and let God know that you trust him to help you make the right choices with your finances.

Small steps are big accomplishments when it comes to straightening out your finances. Years of apathy and mismanagement may have taken a toll on both your bank accounts and your mental health as well. Don't despair. Set up small goals to achieve along the way. Your road to financial freedom will look something like this and we will go over each step in detail:

Step 1 - Pray
Step 2 - Get the big picture
Step 3 - Evaluate your spending
Step 4 - Evaluate your income
Step 5 - Establish your spending plan
Step 6 - Build up your emergency fund
Step 7 - Pay down credit cards
Step 8 - Grow your emergency fund
Step 9 - Pay down other debt
Step 10 - Ways to increase your income
Step 11 - Investing
Step 12 - Ways to save money
Step 13 - Maintaning your budget (and your peace)

If you don't know where your money is going, you will never be able to control it. Do you eat out alot (be honest)? A value meal from a fast food resaurant is approximately $5. If you go out to lunch every work day, that is $25 a week or $100 a month. Do you make a Starbucks run every morning on the way to work to get your double-soy-skinny-latte-with-carmel? That's about $20 a week or $80 a month. Do you get a bottle of soda when you stop to get gas or pass a convenient store? If you do that three times a week, that's $18 a month.

Everyone's spending habits are different. Mine are different than my wife's. Yours are different from mine. Barack Obama's are different than yours. But the question is not what is everyone else's spending habits. The question is what are your spending habits? You need to know where you spend your money...to the penny. The best way to do this is to write down your spending over the course of a month. I did it. I carried a small notebook with me and wrote down everything I spent when ever cash, credit card, check or debit card were used. Simply write down what you bought and how much it was. Include the tax. Do this for a month and you will get a good idea of where your money is going. This will be the most important step in getting your finances in order. Once you have your monthly spending habits, you can start to eliminate unnecessary spending. If you buy a 2 liter of soda instead of 20 ouncers, you get three times the soda for the same price. You can get regular coffee at Starbucks for less than half the price of their premium coffees. You can order off the value menu at fast food restaurants and save $2 a trip. Or you can completely eliminate some or all of these from your spending and save up to $200 a month! That's a huge impact right off the bat! If the fact that you can save $200 a month by simply cutting out some unnecessary conveniences doesn't encourage you, check your pulse. Once you have your monthly spending habit figured out, we can move on to step four.

Your income is pretty simple to determine. It's all your paychecks added up. If you are salaried and you get the same check payday after payday, you can have your monthly income in a matter of seconds. If your hourly, you should estimate as closely as possibly, but estimate worse case scenario. Include any child support, alimony and any other money paid to you on a monthly basis. This monthly income will be compared to your monthly spending and, hopefully, you have money left over. If you don't, you have to either increase your income or decrease your spending. More often than not, the only option you really have is to decrease your spending. You will really have to evaluate your monthly spending. Do you really need digital cable? Can you get by with a digital antennae? Do you need a cell phone? If you do, do you really need a land line? Do you have to eat out at lunch? Do you need Starbucks? You need to get spending below income no matter what you have to cut out of your monthly spending. The next step is where we take a hard look at your spending and, believe it or not, we spend your entire paycheck.

The spending plan will allow you to assign all of your dollars a job and make them do it. Your monthly income will essentially be spent on your spending plan. By setting up your monthly expenditures, you will assign every dollar to one of your expenditures accounts. For instance, you will have a mortgage or rent account. From your first paycheck of the month (let's assume you are paid twice a month), you will take 1/2 of your mortgage/rent payment and set it aside. The best way to start and maintain a spending plan is to use an old-fashioned envelope system. Place half your mortgage/rent payment in an envelope labeled mortgage/rent and don't touch it. Create envelopes for all of your other monthly expenditures (utilities, phone, insurance, groceries, eating out, miscellaneous, credit card, auto loan, emergency fund, etc.) and fund them with 1/2 the monthly payments. If you have money left over, put it in your emergency fund envelope. Don't take money from any of these envelopes except for the ones you established for day-to-day living (eating out, gas, groceries). Leave the money in your recurring monthly bills alone until they are due. Do NOT borrow from envelopes with intentions of paying them back. Like I said, if there is money left over, put the excess in your emergency fund. If you don't have enough to fund all of the envelopes with 1/2 of their monthly expense, you will have to prioritize. The first accounts that you should eliminate are eating out, miscellaneous and any other convenience accounts. On the other hand, the first accounts you should fund are your mortgage/rent, grocieries,utilities, auto...in that order. Try your best to get the emergency fund funded every paycheck. It is also important to incorporate a blow account. This account is not money that you can blow...it is a buffer in case you blow it on your monthly spending plan. This will likely happen when you are starting out. This blow account can help cover any overspending or underestimating you may have done. The blow account is very important and must be used properly. You can not go out to eat more than you planned and dip into the blow account thinking that you underestimated. It is for your life sustaining bills only. You must develop self control for a spending plan to work. Stay with me and you will see that it's not that hard to spend responsibly and also develop the self control that you may think you lack.

Emergencies are viewed differently by different people. When it comes to finances, emergencies have to have a firm definition. They have to meet certain criteria. FIrst, they must sneak up on you. You can't plan for an emergency. If the car breaks down, that is an emergency (unless you've seen the warning signs for awhile). If your water heater goes out...that's an emergency. Emergencies are not the result of poor planning. Second, emergencies must exceed the dollar amount you have set aside in miscellaneous, blow, eating out and car repair accounts. You have to make some sacrifice, even if it means you can't eat out. In the first few months, you need to put as much as you can in the emergency fund until you hit $1000. Once $1000 in the emergency fund has been achieved, you can move on to Step Seven.

Credit cards are trouble. Sure, they are necessary to keep a credit rating up, but we are trying to get away from credit. If you are reading this blog, credit ratings should not be the priority, but rather responsibility. We need to pay off those credit cards. Credit cards should not be used to pay your monthly expenditures and really should only be used to supplement your emergency fund. To go out to eat and pay for it with a credit card is ludicrous. This is because you eat your meal and then suddenly there is nothing left except the bill. Unless you pay it off immediately, your meal (which is gone) will start to cost you more with each passing month. When using credit cards, they should be paid off by the end of the month. Otherwise, the credit card companies will make you pay more for an item than it is worth. Pay down those credit cards. Cut them up and cancel your account when they have a zero balance. Don't let credit card companies keep you in slavery to your money. Start with the smallest balance, not the highest interest rate. Some people believe you should pay the highest interest rate cards first, but that is not the case when you want to get out of debt. Pay the smallest balance off first. Just eliminating that payment has a psychological effect and is very encouraging. But don't sit back in satisfaction and think your job is done and you have freed up that money each month. Take the payment and roll it into the payment for your next smallest credit card. If you have no other credit cards, roll it into your smallest outstanding loan. For example, if you paid off a credit card that you were paying $30 a month on, roll that into the payment for your next credit card that you may be paying $40 a month on. Now you are not making a payment for the first credit card (it was paid off) and you are paying $70 a month on a card you were paying $40 a month on. This will be paid off a lot quicker. Once that credit card or loan is paid off, roll the $70 payment into your loan with the next larger balance. You will then be paying your monthly payment + $70. Keep paying off and rolling payments. It is feasible that within a year, you could be paying $1200 a month on your mortage of $700 a month. You could have your mortgage paid off in 10 years instead of 30. It all starts with paying off credit cards and freeing up money to roll into other payments. But before we get carried away getting out of debt, we really need to revisit the emergency fund in Step Eight.

Now that you're all hopped up on the idea that you can be debt free in a short amount of time, we need to hit the brakes and slow down a second. Once we have freed up money by paying off credit cards, we need to grow our emergency fund. All that freed up monthly credit card money needs to be funnelled into the emergency fund before we start paying down our bigger loans. You need to build up enough money in your emergency fund until you have a minimum of three months pay in there...ideally you will have six months. Anytime you take from your emergency fund, you MUST replace it. That should be easy enough since you freed up that credit card money. Any time you take from the emergency fund, drop back down to minimum payments on everything else and put any extra money back into the emergency fund until it is fully funded again. Then start paying extra on your other obligations in Step Nine.

We visited this earlier, but now we're back. Once your emergency fund is fully funded, it's time to start paying down your other debts. Start with the smallest outstanding balance and take all that freed up credit card money and apply it towards the payment. So you are making your minimum payment plus the freed up credit card payments. Continue to do this until you have paid down all of your debt (including your mortgage). If you are a renter and have all of your debt paid off, put all of your extra monthly payments into an envelope labelled house and save to buy a house (if you want to). Once all of your debts are eliminated, keep funding your accounts. You can increase the monthly amount you fund to your lower priority accounts (miscellaneous, eating out, movies, etc.)...you've earned it. Continue puting as much as you can into the emergency fund. Don't ever stop funding this. Once you are at the point that you are having trouble deciding which accounts to put all your extra money, you have succeeded. You are debt free and a slave to your money no more. Congratulations!

These may seem obvious but I'm throwing it out there, anyway. You can increase your income in one of two ways. First, you can take on another job. Lots of places hire part time, second shift, third shift and seasonal help. You can take on another job, but don't over do it. Especially if you have a family that needs you. You can also turn a hobby into profit and work at home. Or start an ebay business, or some other online business. Get creative. You don't have to go somewhere to make money. The second way to increase your income is not really increasing your income at all, but rather decreasing your spending. It has the same effect. Cancel your cable, cell phones, netflix and anything else that is a luxury. Decreasing your monthly expenses can increase your overall expendible cash more than taking on another job.

The importance of investing can not be overstated. There will come a time when you will retire and that paycheck will not be there. Some companies offer a pension and a 401k, some offer 401k only while some don't offer any retirement. You absolutely must invest in a 401k if your company offers it. Most of the time, they offer a match. That is free money put into your 401k that grows with the rest of your money. Your sources of income in retirement come from pension, 401k and social security. If you don't plan for retirement, you may not be able to sustain a comfortable retirement. If your company doesn't offer 401k or pension, then you need to seek out your own retirement. IRA's are the best way to go. Go to a financial advisor, show him the progress you made and how you are debt free and how much extra cash you have each month and ask him to discuss your options for an IRA. There are mutual funds out there that can also help you invest. I recommend Fidelity or Vanguard as they have the lowest fees and have good reputations. I have some recommended books for investing listed below. Check them out. There is alot more to investing than I can squeeze into this blog.

I absolutely can not stand to pay the price stores tell me I have to pay. Of late, I have made it my mission to talk stores down on the price they tell me I have to pay. I went to Lowe's one day and told them the price I could pay for some lumber to put a deck on. I was blown away by the effort they put out to to meet my price...and they met it. Anymore, the first question I ask stores (Walmart, Shoe Carnival, auto dealers) is "can you do any better?" Alot of times they can. There are three techniques that can be used to get a better price. First is competition. You can always get a better deal somewhere else. Use that to your advantage. Second is "That's not good enough...can you do any better?" They can...and if they think you know they can, they will. Third is the higher power technique. "My husband/wife will kill me if I pay that much." They understand at that point that they the person they are talking to does not make all the decisions about purchases and they will more often than not try to get you a price that you can sign off on by yourself. Coupons are also a good way to save money. Some stores offer double and even triple coupon days. Start clipping. Amazon has affiliates that offer items cheaper for new and used conditions. Ebay is a good place to find deals, too. Be diligent, do your homework and you can save money on alot of things you need.

Now that you are debt free, work to stay that way. Keep funding accounts like you did in the beginning. Keep that emergency fund growing. Try to lower your monthly expenses. Control your spending at all times. Eventually, it will become a way of life and not a burden. After awhile, you will be at peace and it will not take much to keep the peace. Keep at it and you will be among the few in this world that can truly understand and share your knowledge to help others.