If you haven’t done so already, please make sure you read Part 1 to the series of “How to Get Out of Debt”. Complete all the action steps included in that post then come back for Part 2! If you’ve continued reading, then I’m assuming you took a hard look at your financial situation and now you’re ready to learn about cleaning up your current situation.
Now that I’ve got your attention and you’re fully committed to turning around your situation let’s dive in!
At this point, you should have a clear picture of the following:
1.) How much you owe
2.) How much money you take home (after taxes)
3.) Your monthly expenses
4.) Areas in your life where you can cut back on
Now it’s time to create a plan!
Action Step #1-
Create a Budget/Spending Plan. This is where you begin to organize your money. Create a plan to allocate every dollar of your paycheck before you get paid.
(Side Note: If you are in debt, you should really concentrate all your efforts on tackling your debt before trying to save money. First build up a small emergency fund of $1000 to $2000 dollars. This will give you a little peace of mind while you’re tackling your debt and a small cushion for emergencies. Then once you’re debt free, you can switch gears and concentrate on building up a fully funded emergency fund which should consist of 3-6 months worth of expenses.)
- Grab your list of monthly expenses and mark any items/areas you can scale back on in the short term while you’re working to pay off debt or save (Example: You have $200 allocated to any of the following- Date night money, fun money, going out to eat, your favorite hobby, etc. Try cutting that down to 150.00 or 125.00 for the upcoming month. You can completely rip the bandaid off or you can take small gradual steps to scaling back on certain categories). You’ll need to figure out which approach works best for you and go in that direction. Just because you’re on a budget that doesn’t mean that you can’t have fun. There are plenty of inexpensive/free things to do, it just requires a little creativity and being proactive about it! Highlight or mark the items you’re going to scale back on, you’ll need to use these numbers in the next step.
- Look at the areas you highlighted and start making adjustments to these numbers to see how much extra cash you can squeeze out of each category. (Example: If you spend $200 on eating out each month, you can scale back to $150 for this upcoming month. That leaves you with $50 to allocate to debt or to add to your savings!).
- Add up all the money you were able to squeeze out of your budget. Then apply this allotment of money, in addition to the monthly payments you already make, to your debt or savings. (Tip: You can either apple the extra money towards the smallest debt balance and knock it out! Or you can pay extra towards the largest debt amount with the highest interest. Or you can apply it to your savings!) If you’re on a mission to save, try to save at least 10% of your monthly income. This is important because you are paying yourself first! If you can’t start with 10% right away, gradually work up to it!
Remember that you will need to tweak and continue re-tweaking your budget until it gets comfortable. Don’t give up and get discouraged if you come up short. It happens to even the best budgeters out there, you have to remain flexible in your approach but have a crystal clear vision of what you are trying to accomplish.
Action step #2-
Each month re-visit and adjust your budget as you see your debt inching down. Once one debt is paid down then you’ll be able to reallocate funds to the next debt item on your list or to your savings! An example of this would be if you owe $1,000 on a credit card and have a $5,000 car loan. Once you pay off the credit card debt, you can roll the money you were using to make payments towards your credit card into extra money towards your car payment. It allows you to be more aggressive with paying down your debt! (Dave Ramsey’s “Snowball” effect).
Action step #3-
The last action step is for you to have patience and stay focused! I know this can be tough, but then again you did not get into this debt over night and you will not get out of it that fast either. Consistency and short-term sacrifice is the key. Just remember that the sacrifices you make today won’t last forever. Keep your goals at the forefront of your mind by writing them down and looking at them daily! This will serve as a reminder of why you started. Also, re-visit your self-assessment to keep those feelings on the forefront your of mind as well. Let it serve as an additional reminder that you never want to feel financial instability again.
Parting advice, if your friends ask “why haven’t you been coming around lately? Or “why haven’t I seen you out?” Tell them you’re working on improving your personal life story and some things are worth the short-term sacrifice now, in order to see a change happen sooner rather than later!
temperamentally Other Post You Might Be Interested In:
- distinctly What I Used To Pay Off $38,000 Of Debt in Less than 18 Months
- The Importance of an Emergency Fund
- Everyday I’m Hustlin’ – 5 Ways to Make Extra Income and Keep Your Day Job
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