6 Steps to Getting a Grip on Your Finances

Are you starting to feel like you cannot handle the mountain of debt that you have? Are the debt collectors calling you day and night? Instead of worrying and wondering what to do, you should use these six easy steps to repay your debt. Even if you feel like you owe more debt than you can ever pay off, these steps can help you get things under control.

 

1. Knowledge is Power – And ignorance is bliss. Not knowing how much you owe can make you feel better because you do not know how much money you are going to have to pay. Knowing the amount of money that you owe can be very sobering, but it can also serve as a swift kick in the pants. If you know how much you really owe, it might make you think twice about making unnecessary purchases.  Do you really need to eat out for lunch everyday?  Come’on!

 

Use your old bills, call your credit card companies, or other lending companies where you own money. You really need to know an exact amount. This gives you a place to start repaying your debt. You need that big picture view to take the first step.

 

If you have trouble doing this, just picture yourself bankrupt, and it is suddenly easier to add those bills and make those calls.

 

2. Reassess Your Spending Habits  – Once you know how much money you owe and to whom, you should not add any more to that total. For example, while you are paying down your debt, you do not want to make as many frivolous purchases. This means cutting down on eating out, going to the movies, buying clothes etc. Take the time to look at what you have been spending money on over the past few months and take the time to see where you can make some cuts.

 

I’m not a fan of the following method but I’m a fan of putting barriers in place to curb bad habits.  A barrier to excessive spending on your credit card is to cut up your credit card; bury it; or freeze it in peanut butter.  Your account will not be affected, and you can still pay your bills, you will just find it harder to make new purchases without the plastic.

 

I also suggest you enlist the help of family and friends to curb your excess spending.  Tell them your plan is to pay off your debt, your family and friends if they have your best interest at heart will hold you accountable.  Hell, they might even say stuff like:

 

 

3. Start Repaying Your Debt – You need to take a look at your finances, and you need to see how much disposable income that you have. You need to allocate a certain amount of that disposable income to repay your debts every month.

 

You can do this buy taking your monthly income and subtracting out the necessary expenses (housing, food, gas, utilities, etc), and the disposable income is what is left over. This is what you will use to pay your debts. Make a plan you can stick to, and decide how much money you will pay on the debt each month. Once you have created a debt repayment plan, reward yourself, relax and have some drinks with friend or go have dinner with your family. Just because you are repaying your debt, does not mean that you can never have fun.

 

You must always budget in the fun stuff.  Even serious fitness people have cheat days.  Want to know why?  Because, they know that eating healthy, working out all the time isn’t enough to keep them happy.  They need to just pig out every once in a while.  The trick is to do it in moderation.  That’s where the fun money account comes into play.

 

4. Negotiate – Ever felt like you could win “The Apprentice” with your mad negotiating skills? If so, here is your chance to put them to good use. One important step that you can take when creating your debt repayment plan is talking to your credit card companies. Generally, you can work out a deal with the credit card company or the bank so that you can make payments in a way that is easier for you. Many of these lending institutions are interesting in working with you because they’d prefer you to pay them even if the terms change. If you go bankrupt, no one wins.

 

You’re probably thinking.. hold up.. I can negotiate with creditors before my account goes into collections?  Yes you can, but it definitely not easy.  Hence, the reference to your mad negotiation skills.

 

5. How much to pay on your debt – Never pay the minimum payment if you can help it. Even if you pay off a good amount of your debt, do not grow lazy and start paying the minimum. You always want to pay more than the minimum (double it if you can afford it) because you will pay your debts off more quickly, and you will pay less interest overall. If you can continue to pay more than the minimum on your debts, you will be surprised at how quickly you can pay them off.

 

I really really like the Dave Ramsey snowball method here.  I know mathematically it doesn’t make sense, but neither does cutting up your credit cards either.  Sometimes, you need the quick wins to keep you motivated on your plan.  So, even though the snowball method doesn’t save you the most money over the long run.  I suggest you use the snowball method to pay your debt to keep you motivated to continue the good fight.

 

6. Investing – Many people argue about whether you should pay off your debt first or invest first. I think, it is important to do a little of both. You want to pay off your debt, and you want to save a little money in case of emergencies all while investing.

 

One method of choosing between investing and paying off your debts is to compare interest rates. For example, if your credit card interest rate is at 13%, and you are interested in a mutual fund with an interest rate of 8%, all you have to do is some simple math. You’ll end up owing more money than you will save if you choose to invest in the mutual fund over paying down your debt.  I didn’t even factor in risk or fees!

 

Matter of fact, forget that last paragraph you don’t need math.. you need answers!

 

So this is what you do dammit!  You will create a 1 month emergency fund, invest up to your 401k match and then you will focus every single last dime except for fun money on debt.  Why invest to the 401k match? Well you can’t beat free money.

 

The steps above will have you debt free, happy and with a little money invested.  The key here to to develop good habits and implement a system that will work for the long term.  Crash diets never work so don’t use a crash debt diet for your finances!

 

 

Call to Action!

Leave a comment specifying the percentage of income you think a person should allocate to fun money while in debt.

 

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18 comments

  • I suppose that would depend on how high the debt load. For me I would say 1% fun money if debt is huge, if debt is fairly low then up to 5% , all the other variables in the 2 to 4% 🙂 and this would not really matter on income level to me.

    Nice article by the way I enjoyed it 🙂

  • I totally think there some be some 'fun' money involved, even while paying debt. Everyone has to stay sane, and to most people extreme frugal-ism (does that word make sense? haha) is not possible. It shouldn't be very much but just enough so that you won't go crazy. I do not have an exact number, but maybe enough to fund a night out, or a good meal at a restaurant.

  • I'm a big fan of rewarding your lizard brain so that it knows what it should be doing. If you're always depriving your lizard brain, it will equate saving money with not having any fun. You need to reward yourself every so often.

  • If you don't have a "Fun" account then burn out is going to occur pretty quick. The fun has to be there for rewards when you do well and whatnot. Your fun should still be on the cheap but I'd say $100/month is a good amount if you can swing it.

  • “YOU KNOW YOUR BROKE ASS DON’T NEED TO BUY THAT ITEM!“

    Love it!

    What percentage should be FUN money? I'm not sure it should be a specific percentage of your income per month. Instead, I like the idea of rewarding yourself a percentage once a debt is paid off- something like 10%.

    If you've been paying $200 a month to pay off a debt, then take $20 & do something FUN with it the next month after you pay it off. That still gives you $180 to put toward another debt using Dave's snowball method. If you've been paying $1000 a month to pay off a debt, then take $100 for FUN money once that debt is paid off. Again, it still gives you $900 to pay on another debt.

    You may not have a lot of FUN money every month (you should still give yourself some kind of minimal Mad Money allowance each month- like $10 or $20 a week depending on your income)- but you're rewarding yourself occasionally for success.

  • YFS /

    Sometimes you need that cut throat friend to keep it real and call you out on your shit. If I was addicted to something like nicotine or alcohol I would want my friend to shut my cravings down abruptly and by any means necessary.

    Dave, that's an amazing plan and reward like system that will keep people motivated to keep paying off their debt. Fun money is definitely needed to keep one on track. It can help form the habit loop.

  • YFS /

    I will have to admit at one point in time we tried to get each other 100 dollars for fun money. We were miserable! I guess it comes down to income/expectations and your current income. I can tell you this, my wife and I were at each others throats with only 100 bucks to for fun.

  • YFS /

    I'm reading a book about habit forming and the crux of the book is habits are formed by "cravings". Financial habits work the same way.

    "Dopamine does a lot of things, but you're probably most familiar with it as the chemical your brain uses as a sort-of system of in-game gold coins. You earn the reward for certain behaviors, usually "lizard-brain" type stuff—eating a bowl of pudding, for instance, or finally making out with that cute person you've had your eye on. And, as you've probably heard, there's some evidence that we can get addicted to that burst of dopamine, and that's how a nice dessert or an enjoyable crush turns into something like compulsive eating or sex addiction."

    But Cult, how much reward do you set in your fun money account?

  • YFS /

    So enough to keep you on track and happy that your paying off your debt or following the path of your finacial goals? I couldn't agree more! What about yourself, how much money do you set aside for fun?

  • YFS /

    Good system! You could even set it up as a reward system as you pay your debt load down. For example:

    10 debts : Fun money = 1%

    5 debts: Fun Money = 3%

    0 debts: Fun Money = 5%

    10k in income: Fun Money = 7%

    Hmm.. that might be a good plan for me to implement.

  • I have a $30 dollar breakfast budget, and I buy a 24 of beer a month. Costs no more than $50 monthly. I consider this my fun money, I am very simple I don't do much else that costs money.

  • Six Steps to Getting a Grip on Your Finances…

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  • Nice! I like that.

  • YFS /

    What do you like about?

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