What do you do if you find yourself in a ditch? Stop digging! This rule applies to you if you find yourself in debt.
Debts can be debilitating. They make you feel as if you are earning money only to put it in pockets with holes. Yet, getting out of debt is critical if you want to experience financial freedom. To plug the holes of debt and gradually climb out of the debt ditch, here are six tips on how to manage your money during these perilous times.
1. Create a Budget and Stick to It
Just like your car cannot do without windshields in the pouring rain, there’s no way on how to manage your money without a budget. Doing so is like driving blind, every time hoping and praying you are on track, and that sooner or later the deluge will cease.
A budget takes the guesswork out of your financial planning. It focuses expenditure where it has the most impact. Besides, it helps you see with clarity how your financial situation looks and what you can do to get out of the debt ditch. A budget is your first step in consolidating debt effectively. It’s like drawing a line in the sand and declaring: today I stop digging!
2. Track your Expenses
A budget’s primary focus is on how you spend your money. It helps you stick to a financial plan, a very critical ingredient in getting out of debt. Unfortunately, most people don’t even have a clue as to how much they spend every month; perhaps because they rarely track their expenses. They also don’t have a budget to keep their expenses in check.
To understand where your money is coming from (income) and where it’s going to (expenses), track all your income and expenses for a month. After a month, you will be able to get an overview of your financial health. You will see where your finances are hemorrhaging and seal those leaks expeditiously.
3. Trim Expenses
After tracking your expenses for a month and you have a good idea of where you are leaking, start trimming unnecessary expenses. As you cut your budget, you will realize there are expenses you’ve been incurring that are not critical at all.
Once you have trimmed your costs, put the saved funds into reducing your most essential debts. You can start by paying off the smaller debts and then work your momentum towards the bigger ones. Keep up with this habit, and you will soon be out of debt territory.
4. Understand your Income
Another critical step to fiscal discipline is understanding your income. How much money do you get in any given month? This is a question whose answer most people will fudge around. The reality is that if you do not know precisely how much you bring home every month, you won’t be able to allocate it appropriately.
Besides tracking your expenses, an important part of how to manage your money is to monitor your income. Your real income is the difference between your expenses and your income. Your actual income is not your full monthly income. It is the difference between that and your monthly expenses.
If your income is in the negative, it means you are spending more than you make. This means you need to start cutting down on expenses. A positive income is definitely good news. It means you make more than you spend. This is a great time to increase your debt payments and gradually climb out of debt. You might also want to increase your savings if debt is not a critical problem at this time.
Your expenses should be consistent from month to month. If you ever witness a spike in expenses during a particular month, don’t fret! You can contact a payday loan service to help you cover the extra expenses. This short-term loan option will help you stay in control over your monthly income, even if emergencies occur.
5. Consolidate your Debt
Another route to getting out of debt is consolidating it. Being in debt is not something to be ashamed of. If it were, 80% of Americans would be extremely miserable right now. However, staying in debt can be debilitating. It can literary take your breath away, leaving you panting for financial air every month.
If you are unable to get out of debt in one fell swoop, at least start by consolidating it. The benefit of consolidating your debts is that you get a chance to negotiate a better interest rate, that is; the lowest you can get.
6. Establish an Emergency Fund
Stuff happens when it happens. Emergencies do not announce themselves, nor do they care about your budget. However, the best way to avoid getting into further debts when such crises occur is to plan for them by setting aside an emergency fund.
For this strategy to work, the funds you set aside shouldn’t be touched; and, no, gym fees and Starbucks coffee do not constitute an emergency! A real crisis is hard to miss; such as losing a job or a collapsed roof. The critical thing is to let the fund sit there and accumulate interest, and pray that you won’t need to draw from it any time soon.
These are just a few of the many ways you can manage your money when in debt. The old advice of living within your means is critical to staying off debt or getting out of it. However, also important is expanding your means so you can live a more abundant, more fulfilling, debt-free life!