Bad money habit can have a crippling effect on our finances, spinning it out of control while creating seemingly insurmountable debt situations. Becoming debt free is a possibility for everyone; all it requires is time and dedication to implement new financial habits. Here are three reliable steps to a debt free future.
Drawing a budget is the most effective way to gain control of your finances. A budget helps you identify where your money is going and how it’s being spent. It shows how much you earn and how much you need for daily expenses. Budget uncovers various flaws in your finances and expenditure, positioning you to make informed and shrewd financial decisions.
To get started, make an all-inclusive collation of all your credit cards and bank statement for the last month to get a definitive estimate of your monthly income. Afterwards, a detailed and thorough list of your expenses would be needed; creating categories such as Housing Expenses, Living Expenses, Work Expenses, Personal Expenses, and Payments would make it a lot easier. Using a sheet of paper or excel spreadsheet, add up your different expenses from the different categories and compare with monthly income subtracting one from the other. If your income exceeds your expenses then you are living within your means and can still make additional adjustments to create a robust finance, if otherwise, you would have to cut-back on your expenses to avoid and entering into a spiral of interminable debt struggles.
Identify Your Needs and Wants
Clearly differentiating your “needs” from “wants” is imperative to getting out of debt and financial quagmire. It is an essential money management skill that draws the line between solvency and bankruptcy. As the name denotes, a “need” is an indispensable and fundamental requirement for survival and everyday living. On the other hand, “want” is predicated on our desire, fantasies, proclivities, and inclinations which is constantly evolving and can grow astronomically, ravaging resources and causing financial instability.
Differentiating between need and want could be quite challenging. Our sense of judgment can be cluttered by irresistible societal and environmental factors making the line between need and want blurry. Furthermore, “need” and “want” could be muddled up as things that are considered “need” could be deemed otherwise depending on the circumstances. The key to differentiating need from want is to ask yourself “Do I need this exact item in order to survive?” Do you need the breakfast sandwich to get through the day, or will a bagel and cream cheese from home do the trick? Chances are you’d get along just fine and save a handful of money too if you opted for the bagel.
Carefully go through your expenses and determine which items are truly needs, and which ones are wants. You’ll be surprised by how many things you buy simply because you want them, not because you need them. And once you come to this realization, you’ll be in a better position to cut back on your spending so you can pay off debt.
Live Below Your Means
There is a false impression about living below your means, it isn’t about pinching pennies and depriving yourself of things that bring you joy. Instead, it’s about creating a comfortable lifestyle you can afford, with money left over for you to save, invest, or put towards getting out of debt.
What’s the easiest way to live below your means? Either decrease your expenses or increase your income. Or better still, do a combination of both! If you can cut back on your expenses and increase your income simultaneously, you can make some serious progress in reversing your situation.
Once you’ve separated your needs from your wants, go through your budget and make some cuts, starting with your wants. If you cut back a small amount in a few areas, you’ll be surprised by how much money you can free up, which you can put towards your debt. All of these cutbacks should be replaced with more frugal alternatives. If you’ve trimmed the fat from your budget and still do not have enough freed up money, getting an extra job could be helpful.
Take Action to Get Out of Debt
Spending habits could be conclusive in the pursuit of happiness that stems from financial freedom. As the old saying goes; if you do what you’ve always done you’ll get what you always had. If you continue to spend extravagantly it would remain very improbable to free yourself of debts and enjoy financial bliss.
If you feel trapped by your finances, it’s time for decisive action! The three steps we’ve outlined is a good starting point. For further guidance on how to pay off debt, getting advice from credit counselors is advantageous. In a credit counseling session, our counselors will go through your finances with you, help you build a budget, and they’ll also present you with your available options so you can become debt-free.