Ever plan your month but accomplish nothing? You build a budget but quickly realize that your monthly expenses outstrip your monthly income. You have nothing left to save, invest or fund that dream vacation.
Don’t throw in the towel; it happens to all of us.
When building a financial plan, you’ve got to take it slowly. It can take years to pay down consumer loans and credit card debts and establish a habit of saving and investing.
It’s a step-by-step process, but it’s a journey worth taking — starting now:
1. Gather your bills
Get them all in one place — even the pink ones, the yellow ones, the statements you haven’t opened because you didn’t want to face the reality of your situation.
2. Write down your income
If all your money comes from a regular paycheck, this should be fairly straightforward. But if you have income from other sources — a side hustle, child support or alimony, for example — you’ll need to include those dollars as well.
3. Write down your expenses
Start with fixed expenses — items in your budget that remain constant from month-to-month. Fixed expenses include rent, mortgage payments, utilities (if you use an even-pay plan), phone, cable, internet, car payment and insurance.
You might also have a retirement contribution, student loans, credit cards and medical bills. Write down the minimum you are required to pay each month, as well as the total payoff amount for each.
4. Track your monthly spending
Now it’s time for the variable expenses — items such as food, entertainment, gifts and shopping — basically anything that varies from month-to-month. Go through your bank account and take a look at all of the items and services you purchased over the last 30 days. (To get an accurate picture, it may be necessary to look back over two or three months of spending.)
5. Where can you cut?
Look for areas where there’s wiggle room. This may mean calling your billing agencies to ask for lower interest rates, or ask about waiving any one-time late fees or other charges.
Set a budget for each area of spending and stick with it. For example, you might reduce your grocery budget by 10-20% that first month. If that works, cut a little more the next month.
6. Consider a cash-only plan.
Parting with cold, hard cash is much tougher than using your debit card. When the cash is gone, it’s gone — that’s all you can spend for the month.
If you’ve set up automatic bill-pay for your fixed expenses, let them debit your account as usual. Use cash for the expenses you pay in-person, like groceries, trips to the salon, going out with friends, and so on. Separate the cash by category into envelopes, or mark it with paperclips and notes. Once the case from any category is gone, you’re finished spending in that particular area for the month.
7. Stop taking on more debt
Eliminating debt is impossible if you keep adding on. So put away the credit cards, the lines of credit and the retail cards. It’s tough but necessary. You’ve got to stop debt from piling up!
Financial expert Dave Ramsey suggests paying down debt using what he calls the “snowball method.” Make minimum payments on all debts and put any extra money toward your smallest debt until it’s paid off. Then take the amount you were paying on the smallest debt and roll it onto the next-smallest debt. As your debts get smaller, your payments get bigger, and you see progress quickly.
8. Save for emergencies
What happens if your transmission goes out, or your roof starts to leak? What if you fall and get hurt, or your dog or cat falls ill. You’re going to take out your credit card, apply for a line of credit or take out a payday loan, right?
No, absolutely not! All the work you’ve done would go down the drain. This is why it’s critical that you build an emergency fund. If you’re serious about getting your finances under control, you must set aside money for the unexpected.
A good rule of thumb is $1,000, which is enough for most minor bills, and it doesn’t take a lifetime to save. Use this money for emergencies only. (No, a bridesmaid’s dress, a new couch or concert tickets are not emergencies)
By now you’re probably feeling overwhelmed. That’s why the financial coaches at Hope S Piggee, CPA, are here to help. We’ll be your accountability partner.
Information alone does not create change. Schedule a FREE consultation today: 980-224-3427