Q. HOW DO YOU GET CONTROL OF DEBT? A. SPEND LESS THAN YOU EARN.
Now, don’t look at me like I’m a moron! Of course you know that to reduce your debt, in fact, to even survive, you need to spend LESS than you earn… However, one of the biggest mistakes people make is to look at their current bank account balance to decide what they can afford.From ‘I can afford that new jacket’ to ‘YES! I can afford a week at that luxury resort!’. The decision on where to spend those extra dollars shouldn’t be decided from your current bank balance.Fortunately, in some cases it is true, you can afford it. However, it is more often good luck than good management.For example, have you ever had a big bill come in, like rates or car registration, that has caused you to have a very tight week or month financially? This is caused by lack of planning. Less than 10% of people actually use a Cash Management System to know exactly what they can and can’t afford.When I say “Cash Management System” it is because I didn’t want to use that awful, scary and much hated word ‘Budget!’Everyone has heard of a budget and most people think they have used one. Most of us really think a ‘budget’ is a list of expenses, which is then totalled and deducted from our expected income and voila – we have completed a budget and have a surplus or deficit amount.If it is the latter, we go back and tweak this list until we have a surplus and then we proudly put down our pen and pat ourselves on the back for having done such a great job.Best case – we even watch our spending for the next week or two in respect for our new ‘list’.So now we have a list – it shows us our income and outgoings – nothing more. A true budget, or Cash Management System takes this a “big” step further.It sounds a little complicated, and time consuming (and without the right tools it can be), however, having a Cash Management System or spreadsheet can make it as easy as 1, 2, 3.
Write the list and check there’s surplusIt is important to try and make it as thorough as possible. Remembering all of the one-off and irregular costs can be quite daunting. Starting with a comprehensive budget list can help to jog your memory.
Track your expenses regularlyTrack your expenses and compare against proposed expenses. This is the ongoing part. A true budget is when you track your everyday spending, automatic deductions, regular payments and compare it against your ‘proposed’ expenses on a weekly, monthly and quarterly basis.
Review your spendingReview your spending every three months for surplus and deficit amounts and make adjustments to the budgeted amounts. This means you will be working with actuals instead of guesstimates.