I have recent had the opportunity to coach a few people with varies financial difficulties. I won’t go into too much detail, but that all have two things in common. They had debt and didn’t know where to begin to get out of that debt.
In my initial conversations with someone I always ask a number of qualifying questions. I like to get an understanding of their current situation. A key for me is understanding “why” they want to get out of debt. If they can’t answer that questions, then I know they might not be ready to begin or simply just need help getting to that answer.
A particular couple, was eager to get started, so much so that they were looking to bypass some of the early steps and jump to automation. When I mentioned the word budget it was like I was insulting their mother with four letter words.
I knew right away they were going to present a unique challenge for me. I stopped with that line of questions and tried a different approach.
What do most people make before they go to the grocery store?
A shopping list.
What’s usually sent out prior to a start of a meeting, so everyone attending understands what’s expected to be covered during the meeting?
A meeting agenda.
What do football players study from?
Playbook (husband answered)
What do you need to build a house?
Set of plans.
What do all of these things have in common?
They help people get organized before they begin working on an activity or work better as a team. So if I now ask you what’s the best way to understand your finances, what would you say?
You Don’t Know, What You Don’t Know
There are many different ways to track a budget. However, when you are first starting you need a blueprint for your money. You need to know how much money do I have coming in and how much money do I have going out.
This is usually done on a monthly basis as bills get paid monthly. Once you capture this data you can begin to build a plan from it. Are there expenses that can be cut? Are there subscriptions service we are paying for that we no longer use, etc.
Getting this information on paper give you the organization you need to begin to make changes with your money. It may take a few months to accurately get a handle on this information. Some bills get paid every two months or quarterly, or maybe they fluctuate each month and you need to average the cost.
Here’s a template as an example. Once you have your basic money blueprint captured you can move on to other things.
Once you have your money blueprint defined and understand all of your income and expenses, you can begin to take the next steps in your financial journey. Here are some tips and tools to use to help save time and organized further.
Direct Deposit – This is a straight forward one, saves time, allows you to automated where your money is going. Easily allows you to pay yourself first with a transfer to a secondary saving account. Why would you waste time and energy cashing a check?
Emergency Fund – Or the peace of mind fund. You need to have some type of cash saving for when life happens or Murphy come to visit you. A $1000 saving will cover must events and reduces so much stress and helps avoid money fights you will have no idea until you have the e-fund in place.
Wants verse Needs Test – All purchases can be put into one of these two categories a want or a need. It’s time to priority the expenses in your blueprint into these two buckets. Food and shelter are clearly needs, while the new 60-inch television or pair of shoes are clearly wants. I think you get the idea.
Receipt Tracker – I like recommending saving all receipts for two or three months and tracking all spending. Reviewing this will help identify any routines or leaks in spending that you might be unaware of. That daily cup of coffee, the convenience meal once a week, the impulse purchases at the department store, etc. These small unknowingly purchases could be costing you a good bit of money overtime and keeping you from your money goals.
Debt Snowball – The debt snowball is a debt reduction method where you owe debt on more than one account. You pay off the accounts starting with the smallest balances first while paying the minimum on larger debts. After the smallest balance is paid off, the payment is snowballed to the next smallest debt. This method helps build momentum. The Debt Avalanche method is where you pay off the balance with the highest interest rates first. Anyway you choose to pay off your debt is fine, as long as you are not adding any new debt along the way and adding as much additional money as possible to your repayment is the key.
DoBot – DoBot is a saving tool that connects to your checking account and analyze your income and spending. Over time it finds small amounts of money usually between $5-50 that it can safely set aside for you. The money is stored is a secure account and can be withdrawal at any time. This is a great tool to help increase your savings rate.
There are many different tools and approaches to tackling your debt. They call it personal finance for a reason. You need to find the best solution to fit your personal situation.
Just like I found out when coaching varies individuals, I had to tailor my approach to meet their needs, as there is not a one size fits all plan to getting out of debt.
What’s your recommended start point for gaining control of your money? What tips or tools would you include?
Brian is a dad, husband, and an IT professional by trade. A Personal Finance Blogger since 2013 who, with his family, has successfully paid off over $100K worth of consumer debt. Now that Brian is debt-free, his mission is to help his three children prepare for their financial lives and educate others to achieved financial success. He blogs at Debt Discipline.