Escaping the Jaws of Debt- Part 1
According to www.cnbc.com in their article, ‘Here’s how much debt the average US family has in Credit Card debt’, the average American family owes $8377.
This is just credit card debt. This still does not include debt accumulated by loans such as car loans, student loans, and mortgages. That’s a lot of debt and it seems to be increasing for the average person. I too was swamped in debt. I took out a loan for a car, owned a credit card, and a series of unfortunate events, like being laid off, along with some poor decisions contributed to me ending up deeper in debt. For me to be liberated from the jaws of debt, I had to employ eight very useful strategies. Four of these are featured here, and the last four will be featured in Part 2. They were:
1. Budget! And Stick to It!
After scouring the internet for some strategies to come out of debt, a common topic I stumbled upon was budgeting. To make this part of my lifestyle, at the beginning of each month I sat and planned where every cent of my possession will be allocated for that month. One must have a plan to get out of debt and a major part of the plan is a budget. For my first budget, I simply sat and thought of every fixed expense I had for that month including all bills, loans, and any other financial commitments.
I then decided to allocate money towards different areas of spending by setting a reasonable budget for each area. These categories were food, entertainment, transportation, education/development, household maintenance, leisure, savings, and so forth.
I noted all of these categories in a spreadsheet and ensured that all the money I earned for that month was allocated for the budget of that month. Here is a screenshot of one of the first spreadsheets I created for my personal budget:
We cannot predict all the situations that will occur in the future that will require us to spend. Hence, I created an ‘Unforeseen’ category that will have money allocated to help serve any unexpected situation that occurs during the month…like if the dog ate your shoe…yes, these things happen!
The categories were created to cover every possible, expected, spending area in my life. Click here to download a template of the budget spread sheet.
2. Keep Track of Every Cent Spent
Yes, I did say every cent spent. I still do this to this day. Whatever it took, I ensured that I knew exactly where all of my money went. Before I started using this strategy, a month would pass by and I would be absolutely lost, wondering where my entire salary went.
All money, whether it was a salary, loan, interest, gift, yes, all money spent and received, each transaction I recorded. I ensured that at the end of each month I was able to account for each cent earned or spent whether it came from the cash in my possession, a bank account or credit card. This strategy was used alongside the budget I created each month to ensure that I stayed within my budget limits.
Keep your receipts!
To help me track my finances, I used the mobile application, Wallet by BudgetBakers. There are many other applications available but I took a liking to this one. You can find more information on it here:
Using the Wallet app, I created and recorded the transactions and balances for all cash, credit card, loans, and each bank account.
Now, if I ever have to check how much money I have, I don’t have to check the cash in my pockets or get a bank statement. I just take a look at the app and I can see all of my account, cash, credit card and loan balances.
The app also allowed me to easily monitor the total debt that I was in and the remaining money in each budget that I set.
The key here was consistency! It’s easy to become complacent and stop recording transactions. After each transaction I had to commit to recording it immediately.
3. My version of the ‘Snowball’ Technique
You may be wondering what snowballs have to do with managing your finances. The original version of the snowball technique for debt reduction can be found here: https://en.wikipedia.org/wiki/Debt-snowball_method. Since I did not have many different loans I decided to tweak this method to focus on my credit card debt.
At the end of each month, any remaining money from selected budgets, for example, entertainment or food, I bundled and added it to my credit card debt payment. This really went a long way in reducing my credit card debt quickly! This accumulation (like a growing snowball) can help reduce debt!
While in debt, I still had to maintain my car or pay for a family vacation. I also applied this technique here. If I budgeted $1000 towards my car each month for its maintenance and at the end of the month I remained with $100 in my car maintenance budget, this was added to the next month’s $1000 car budget. So, in the following month my car budget will be $1100. This allowed me to accumulate finances over time for different aspects of life without feeling the pinch.
4. Don’t Consume all that You have Access To
No, you cannot spend everything that you earn….even when in debt. Yes, priority should be placed on clearing debt and covering critical / important bills but some portion of income must be saved or invested, no matter how small! I always placed some small amount aside as savings even when I was swamped in debt and bills. You cannot consume all that you have access to.
This was also posted on our blog, dealingwithdifficultsituations.com.