Attack Your Debt #13: Where do I start?

A few years ago I woke up one day and realized I was in trouble.  My debt had been building for quite some time, but I felt as if it had snuck up on me.  I knew my credit card had a balance, and a high one at that, but I kept thinking that I was due for a commission check, expense reimbursement, or a tax refund that would wipe it all out in one fell swoop.  But I was wrong.  I didn't have those windfalls coming and I had no choice but to face my debt and start chipping away at it.

I read personal finance books that said things like "live within your means" and "pay yourself first" and I couldn't understand why these concepts that seemed to simple to others meant absolutely nothing to me.  I thought I was living within my means - I didn't have diamond jewelry or a new car.  I thought I paid myself first, after all I'm spending the money on me to make me happy.  But yet I was still stuck in my dark hole that I had dug for myself and I became more scared as I saw no way out.

So I tried different techniques and failed many times over until I found something that worked for me.  There is no one size fits all solution for dealing with your finances, but today I thought I'd share what helped me to get started on the road to paying off my debt in the hopes that someone else feeling just like I felt once, would find some ideas that would help them to take the first step towards debt freedom.  Here we go.

1. Find out where your money is going.

You may think you know how much you're spending, but trust me, unless you're tracking it you have no idea.  I thought I spent about $30 per month on gifts and was shocked to find that I really spent about $150.  Here's what I did (and still do) to track what I'm spending.

First, I track my regular monthly expenses (rent, phone, internet, food, entertainment, etc.).  I track these in an Excel spread sheet but you could use an online tool like Mint as well.  It's important that you get the categories right based on how you spend your money.  For example, I don't have a make-up category since I haven't bought any in 2 years, but if you spend on it regularly make it a category.

An excerpt of my monthly expense tracking (click on image to view larger version).

In my spreadsheet I first make one columns for my budget which is really my estimate.  This is what I would like to spend.  It's not a hard and fast budget so I don't feel guilty if I break it (if I feel guilty I'll just feel defeated and give up so this is important for me).  In the next column I track the actual amount I spend and I find that simply having a goal (i.e. $350 for food) helps me to be conscious of my spending.  The key for keeping up my tracking is to say I'm just doing it for a month and making sure to always ask for receipts.  Try your best, but if you lose a receipt just estimate, it's okay to do the  best you can.

Next, I create categories for expenses that happen on an annual basis (you can see a snapshot of mine below - I actually have a few more categories not displayed).  Some happen only once a year (i.e. Christmas and taxes) and some happen throughout the year but at sporadic times (i.e. vet bills and car repairs).  I create a generous estimate for the entire year for each of those categories as well using any data I might have (i.e. vet bills from last year).

A excerpt of my annual expenses (click on the image to view larger version)

2.  Figure out how much you're spending annually.

Alright, now you've tracked your monthly spending for a month.  Go ahead and multiply each expense category by 12 to see how much you're spending on that category each year.  This is always eye opening for me.  I'm spending $800 for a cell phone?  I'm spending $780 to go to my gym 6 times a year?

Looking at your expenses this way forces you to look at the bigger picture.  It's not "just $65 per month to stay in shape" it's "$780 per year for a gym we hardly go to that could really help in paying off my credit card."

Next, add in your annual expenses and see how your total spending compares to your salary.  Are you spending more than you make?  Do you have enough extra to save for that down payment or pay off debt?  This is where you need to start analyzing your spending to see if it aligns with your goals.  Identify any areas you can cut back on, and how much extra you'll gain from that.

3.  Pay yourself first.

This is one of those stupid phrases that meant absolutely nothing to me at first.  In simple terms, to "pay yourself first" means to treat your future like a bill.  After all, isn't your future just as important as cable TV or your cell phone? Add a category into your monthly expenses called "savings" or "debt payoff" depending where you are right now (mine is called "2014 expenses" in my monthly expenses spread sheet above).  You need to treat that category like a non-negotiable fixed bill and put the amount into it that you found by analyzing your budget in step 2.  If you said you could find an extra $400 each month, you're going to automatically pay that to yourself - you can even set up an automatic transfer to move that amount from checking into savings each month, if you have your debt all paid off.

So if you don't have your debt all paid off, that monthly payment needs to go to yourself for a few months until you have an emergency fund built up.  You can figure out what that amount should be based on your expenses but don't get paralyzed by that.  If nothing else go with $1000 and get that saved up first.  This way, if your cat gets sick or your car dies you can pay for it in cash without going back into debt.  Sure, you could just tack it onto your credit card, but paying off debt is mental more than anything, and you can feel defeated if you have to do that.  Once you have your emergency fund filled out, keep making those payments to yourself, but put every cent towards your debt until it's wiped out.

4.  Track your debt payoff.

I had a lot of debt, $65K to be exact, and I felt like I wasn't even making a dent.  So I started to track my debt payoff by month.  I created a spreadsheet where I tracked my payments, the total amount paid so far, the total balance left.  I would also recommend adding a column with your projected debt freedom date based on making your payments for the amount "found" in step 2.  Each time you find some extra cash to throw at your debt you'll feel awesome seeing that date become closer.

Tracking my last debt payoff (click to view larger version of the image).

This process kept me motivated and focused and towards the end I was finding every possible way to cut my budget so I could get to zero quicker.  It becomes a game and you feel really proud as you dig yourself out and develop new skills that will allow you to continue after zero, to building your networth.

5.  Get started and attack your debt!

Phoebe