Rich Snail

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While setting up your budget you listed down all your debts and minimum repayment. You now have to get back to this list, review it, and think over your strategy to get rid of most of them. Why not all of them? Not all debts are bad. Some are an inescapable part of life; mortgages as an example. Your goal should be to eliminate the bad ones.

Stop the bleeding

The first thing you need to address is stopping your debts from growing. Use your budget, track your progresses, and make sure that your expenses match your income. If it does not already, you are creating debts; so review your figures, and do your best to make it work; earn more / spend less… whatever you prefer as long as it gets back to sustaining your lifestyle.
One of your budget line is allocated to your debt-repayment; it should covers your minimum repayments, plus, ideally, some extra reimbursement. That extra can be used in two very different ways to get rid of debts.

The financial way

If you are a very logical and methodical person, you should pay off your highest interest debts first. In the long run you will pay lesser interest rate than if you do the contrary.

• Order your debts by interest rate
• Pay all your minimums payments
• All of the remaining money should go to your highest-interest rate one
• Once you cleared the highest-interest rate debt, your money goes to the next-highest-rate one.

The psychological way

If you need to see results quickly, you shoud attack your debts by reverse balance order. This is what Dave Ramsey called “the Debt Snowball method” in his book The Total Money Makeover. His concept is simple; you should attack your debts from the smaller-balanced one to the higher-balanced one. This will help you achieve quick-results, and help you stay on track.

• Order your debts by balance
• Pay all your minimums payments
• All of the remaining money should go to your smaller debt
• Once you cleared the smaller debt, your money goes to the next-lowest-balanced one.

To each his own. What is important is that you stop creating debts, start reimbursing more than the minimum, and stay on track. It is not an easy process and it is a lengthy one. So good luck and keep track of your progresses.

By tracking your spending, you know where your money goes. It is time to set up a budget. What is a budget you may ask. It is a plan that shows what money you plan on spending. You may be afraid of making mistakes drafting it; you may feel like it will end up all wrong; and it most certainly will as you can not accurately predict the future - if you can, please send me an email!
So why do you need a budget?

Budget = treasure map ?

A budget will help you think ahead. It is here to help you achieve the goals you defined and refined. This is why I see it as a treasure map. It set all the little dots you have to link in order to get to the final line, all the check-points you have to go through to reach the cross mark, all the obstacles to overcome before reaching your reward.

Spending Plan

But before celebrating, you have to draft your budget. To get you started, you simply have to take a piece of paper, and ask yourself 3 questions:

• Expenses - How much do you need to spend to maintain your lifestyle? To answer this question you should list down all the expenses you will make over the coming month(s). All the ones you are tracking on a daily basis should be here, plus a few more representing large expenses you foresee (house repair, vacation etc.)
• Income – How much will you bring home next month? I’m sure your know the answer to this one. Straightforward answer.
• Debt – How much is your minimum repayment? You should list down all your debts, along with their minimum payment. By minimum payment I mean the one you can not escape.

Once you’ve done that, you can arrange it in a spreadsheet. Following your current assumptions, do you have something left at the end of the month once you deduct your expenses and your minimum debt repayment from your income? If you do, congrats! You are saving money. If you don’t, play with the figures (reasonably of course) so that you get a positive bottom line. Imagine how much you would save, and how your life would be without cable TV.

Work in progress & Tracking

You should consider the budget / spending plan you just drafted like a work-in-progress. It will certainly evolve over the next few weeks and months. It will evolve thanks to your reviewing it with your tracking sheet. Your tracking will help you come up with more accurate figures. You will also add some expenses which you first forgot to write down. You should review your budget on a regular basis, and draft new ones for the coming months / years even more regularly. Try to see it as a game.