Step 4: How to Control Your Spending
No matter how much debt your have, the key to avoiding more debt is to control your spending. While there is no magic bullet to getting out of debt, keeping your spending in check greatly increases your chances of living debt-free.
Make a Budget
Spending without knowing how much your are actually spending is a recipe for financial disaster. Making a budget doesn’t necessarily mean that you spend less, either. What it helps you to do is focus on your priorities.
To make a budget, first list out all of your monthly obligations from debt and mortgage to utility bills. Don’t forget items you don’t pay every month, such as health club memberships and insurance. Then, using your monthly take-home pay (after tax and after savings), subtract your monthly loans and bills so you know how much is left for items such as gas, groceries and clothing.
But don’t stop at this point. Make sure you aren’t spending more than you think on little items such as coffee, lunches out, dry cleaning and movies. You’ll also want to make sure you have an emergency savings account, for things like emergency car and home repairs. This prevents you from having to use a credit card to pay for unexpected expenses.
Part of the budgeting process is establishing discipline in your spending. When you look at how much money you make each month and how much you actually need to live, you may find that you do not have as much as you thought for things such as going to movies or restaurants. You may have to cut back on spending until your debts are paid off. Be creative in your cuts – use coupons, have movie nights at home and hunt for sales. And remember you can reallocate money. Instead of spending $25 a week at the dry cleaners, cut back to $10 a week and spend the leftover $15 on a movie. This is why budgeting is important – if you know where your money is going, it’s easier to reallocate your spending on things that are truly important to you.
Knowing where you are going can make being disciplined easier. Set some financial goals of where you want to be. This can help you in keeping your spending in check. Start with the big picture. Where would you like your finances to be in 25 or 35 years? Once you have an idea as to how you want to retire, work your way back. How much do you need to save for the next 10 years to make that happen? What about five years? What about next year? Are you spending everything, or are you saving now? Knowing what it will take to achieve your financial goals can give you a reason to control your spending.
Try Cash Only
One trick to help you control your spending is to pay for everything in cash. Once you have a budget, set aside the amount of cash that you will need for each expense (at least the ones that you can pay cash for). Make an envelope for each spending category: groceries, dining out, gas, babysitting, etc. Once the envelope for a category is empty, you cannot spend any more for that category until the next month, unless you take money from another envelope. This budgeting exercise forces you to make choices so you are spending your money on what’s most important to you. In addition, paying cash helps you realize how much you are truly spending, so you tend to spend less.
Leave the Credit Cards at Home
If you know your credit card is in your pocket, then you know you have it for backup. To keep from spending, leave your credit cards at home so you aren’t even tempted to use them. One word of caution – if you are traveling, it is probably better to take at least one in case of an emergency. But for your daily life, there is no need for a credit card to tempt your spending. You can’t add to its debt load if it is not with you.
By working hard to control your spending, you will be rewarded by not only being able to pay off your current debt, but also by avoiding more debt. You are on your way to financial freedom.