In Part 1 we looked at what Cash Flow is, and the golden rule of money; don’t buy stuff if you don’t actually have the money (real money in the bank, not credit)
I’m sure that sounds easy enough and it makes sense, but what if you don’t actually have money in the bank? It’s quite normal that people have multiple credit cards (some of which are maxed out), and as soon as they receive any money it just goes straight to paying debt. So there’s nothing left and you simply have to continue using the credit on your card on order to survive. So how can you change that?
Changing your “money cycle”
Perhaps you remember this image from Part 1. Option 1 is when you use your current salary to pay for things you’ve already bought (which is backwards) and Option 2 is when you use your current salary for future purchases and spending. If you are currently on Option 1, you need to move to an Option 2 strategy. (If you are already on an Option 2 then well done!, but keep reading anyway)
Some people are “in between” as in they use their current salary to pay off debt and there is a bit left for the rest of the month. That’s okay, you’re on the right path.
There isn’t really an easy way to change this cycle and depending how much debt you have it could take several months (or even years). Changing your habits and decisions is relatively easy, but staying focussed when it seems you’re not winning can sometimes be hard.
Have a look at the steps you need to take in order to change to a “forward spending” cycle (or a positive cash flow)
Step 1 – Assess your situation
Start by finding out exactly how much debt you have. List all credit cards, store cards, personal loans, bank loans, etc. Find out the interest that is charged on each account and find out how much you are paying monthly on each.
You may need to go through your statements or even phone the various institutions to find out the info but in the end you want the Total Owed, Interest Rate, Monthly Payment & Months Left for each loan. In the case of a credit card (or store card) the monthly payment changes each month, and its not like a traditional bank loan where you have a set number of periods. That’s okay, just write down what you can and do it in a way that makes sense to you.
Step 2 – Create a budget (or relook at your existing one)
There are many resources on budgeting and some great apps too. A key aspect of personal finance is that it is “personal” and whatever tool or method you use really needs to make sense to you and needs to be easy for you to use. You can look at my blog to Create a Budget in 5 Simple Steps. Use this opportunity to delve into the topic more! Start with something (even just paper-based) and as you research and learn more you can start using spreadsheets or apps or even build your own tool (some people are clever like that!)
Use this budget to work out how much money you have left after paying off debt. You’ll need to play with this figure a bit as we work through the rest of the steps.
Step 3 – Prioritize your debt
You need to make a plan of how to pay the debt off. You will obviously need to continue paying all your debt, but have a look through your list and decide where you want to pay extra money. Pick one debt which you want to pay off as soon as possible.
You might want to select the smallest debt – the one which you can pay quickest. This will be a great achievement and paying it off will motivate you to continue. You could however look at the debt with the highest interest rate and decide to pay that off first.
Make sure that the first goal you set is relatively easy to achieve as you need this plan to really work for you and to keep you motivated. So prioritize your debt according to the order in which you want them all paid off (even if it is a very long term plan).
Step 4 – Stop creating more debt
Make a decision to stop creating any more debt – from right now! If you really are in so much debt that you currently don’t have any money then you will need to be harsh with yourself and cut back on spending dramatically!
A great way to do this is to take your store cards and credit cards out of your wallet and hide them somewhere. Just use cash from now on.
If you really don’t have money in your bank, maybe allow yourself 1 credit card in your wallet for absolute essentials. You have to stop creating more debt though in order to pay it off! It’s impossible to pay off debt when you keep making more…
Use your budget to see how much extra you can pay whilst still covering all your expenses. It’s also okay if your don’t have anything spare to pay extra, as long as you can work towards not creating any more debt.
Imagine that you could spend cash from now on and continue paying off your monthly debt payments. You will at some point pay off all your debt! As one debt is settled you obviously have more money to put towards the rest – it’s really an exciting thought.
Step 5 – Learn about frugality, budgeting & making wise money decisions
This is the fun part, and it’s an ongoing process. There are so many great blogs, Twitter accounts, YouTube resources etc that you really have no excuse to not learn! Decide today to take control of your money and consciously look for resources to assist you.
Step 6 – Find a way to manage your money
This was touched on in Point 2. You need to find a way to manage your budget, spending and financial goals. This could be a notepad, a spreadsheet or an app. There really are many great tools available! I use YNAB which I really love, you can try it for free for 34 days; and if you use my referral link you can also get an extra month free.
Don’t be afraid to try something and if it doesn’t work for you, move on. This is a constant learning experience and refining your system and method is part of the learning.
- Assess your situation
- Create a budget
- Prioritize how to pay off your debt
- Stop creating more debt
- Learn about money
- Find a system that works for you