It’s all coming together now. In Step 1 you looked at your income and Step 2 was all about understanding your expenses.
Now in Step 3 we’ll look at debt. This is just to give you better insight as to what the situation is and there will be a whole module dedicated to debt as part of the ‘Fix My Money’ course. I’ll send out info about that as soon as it’s ready.
Step 3 – Analyse your debt
One of the terrible problems with debt is that we have to use our current months income to pay for past expenses. So what this means is that we don’t necessarily have enough money left to see us through the month which is why we inevitably use more debt. And so the cycle goes. You can read more about this in my post on why cash flow matters.
However, in your early stages of budgeting you need to really know how much money you need to allocate towards paying debt off and hopefully you can slowly reduce your overall debt situation.
Right now it may seem daunting to try budget, save, pay off debt, invest and do all these good things so simply focus on what you’ve covered so far.
Keep track of your income and keep very detailed track of your expenses. And cut down where you can!
Exercise 4 – analyse your debt
Using the workbook list all the debt you have and work out which debt is the quickest to pay off.
See if you can find some room in your budget to pay a little extra towards your debt. However, if you continue to monitor your income & expenses and plan your spending better you will soon start to find ways to cut down on things and you will be able to think about paying off your debt.
So don’t try solve all your issues now, but don’t be ignorant and pretend there’s no problem. Look at how to unwind the debt spiral if you’re interested to know more about this now.
Step 4 – Plan for next months expenses
You now have all the info you need to put together your budget! You know what you earn, what you spend as well as how much debt you have.
Now is also a good time to think about upcoming expenses that you know of such as birthday parties, anniversary, events you have to attend or just some car maintenance.
Exercise 5 – make your plan for next month
Look at your Obligations, the things that you have to pay. Write them all down and refer back to your bank statement to confirm that you’ve listed them all along with the correct values. Your debt payments should be in this list as you really have to pay your debts! So credit cards and store cards need to be accounted for. List the minimum payment for now but hopefully you’ll find a little extra somewhere.
Next up list your living expenses. Again look at your bank statement to see what you have been spending money on and also look at whether you marked any of them as “obvious overspends”. In that case you know what to do…
Now see if you have enough income to cover all the expenses you’ve listed on your budget. The only way to start fixing your finances is to ensure that you spend less than you earn! This could really be tricky for the first few months but if you’re serious about this then you need to commit to doing it right!
If there is not enough income to cover your expenses then you need to cut down somewhere. It’s hard to decide where or how and you may need to have some discussions with your partner or family. Go back to Nicolettes video and listen at 10 minutes 12 seconds point, she talks about lying to yourself to make the numbers balance.
If you do however have enough income to cover your expenses you should now consider:
- paying more towards debt (the high interest rate on debt costs you a lot of money!)
- a few “nice-to-haves”
- saving towards upcoming expenses that you know of
- saving towards an emergency fund
Wow, that might seem like a lot to do with possibly little money.
It’s all about priorities and as you learn to manage your money better, it definitely becomes easier. The worst thing you can do right now is to be overly-confident and to create unachievable goals for yourself.
Be realistic about your money, your habits, your family needs, etc and try to make small changes here and there to set yourself up for long-term success! It’s the small and consistent habits that will make a huge difference in the long run!
Step 5 – Your budget in action
Your budget is not a static document that you look at once a month but rather a collection of habits and constant evaluating and tweaking of the plan.
Exercise 6 – Track your expenses
So firstly, keep track of all your expenses. Do it in an app, a journal or an Excel spreadsheet. It may seem laborious but how many times in a day do you actually spend money? For me it’s possibly 3 – 5 times so to capture the category and amount takes less than 3 minutes!
Also keep track of your income; especially if you are a freelancer! Follow up on invoices and alter your plan accordingly. If you have budgeted some nice-to-have’s but your invoices aren’t yet paid, rather delay your spending. Focus on only spending what you actually have and work what you need to do in order to maintain that.
Keep it all simple! Don’t over-complicate things and definitely don’t start off with multiple spreadsheets, documents and complicated formulas. Just do what makes sense to you and what is quick and easy. You can add more details over time but rather start with a simple system and tweak and build on it as time goes on.
And finally when things go wrong don’t stress about it too much and get upset. Rather analyse what happened, why it happened, how you feel and then reassess your plan and move on! Life is constantly changing and we really have no idea what next year, next month, week or even tomorrow has in store for us. So be ready to adapt your plans.
Keep doing what you’re doing and keep updating your budget, your goals and your habits. Keep learning by reading blogs, books and listening to podcasts about managing your money and keep it real!
Follow my blog and subscribe to my email list if you haven’t already and look out for my upcoming course called “Fix My Money”.
And finally, get your Financial Health Score and keep working on ways to improve it!