This is a guest post by David Auten and John Schneider from DebtFreeGuys.com.
Every year two goals top the lists of New Year’s Resolutionists, get healthy and get out of debt. Whatever the reasons, stress, laziness, financial duress or any other, these two goals appear time and again on your list every 12 months. Why do your good intentions drift away by mid-January as certain as the tide rolls out twice a day?
Getting financially healthy, as with physically healthy, requires both mental and physical habits. If you can’t remember the last time you hit the gym and then strap on your spandex leotard and head to 24 Hour Fitness to lose 15 pounds, you’re likely put in three to five hard workouts at best. By the third day, you’re in so much pain you can barely walk. Your body and mind cry out for a break and you quit. Within a week, you’re hitting Ben & Jerry’s Chubby Hubby on the couch while you binge watch the second season of Orange is the New Black.
This happens with your finances, too. You commit to not going to happy hour, not dining out, not going to the mall or hitting the slopes. All spending comes to a grinding halt. Then, you see your friends post on Facebook all the fun they’re having. You tire of the third batch of ramen and your boss returns from Whistler and declares he had the time of his life. You quit. You go on a spending spree and add more to your plastic than you pay off. You’ve now had one too many late night runs for that Chubby Hubby.
What’s the solution? How do you get into a pattern that helps you lose the “debt” weight? The answer is that you must first become money conscious and then create a realistic plan. You can’t bench press 150 pounds or do an hour-long spin class without first conditioning your body for those activities. So too with your finances. You must first become money conscious before you can create a plan to get out of debt.
Be Money Conscious is the first principle in 4: The Four Principles of a Debt Free Life by yours truly. You may want to put $1,000 a month towards your debt without holistically assessing your financial situation first, but is that possible or smart? Just like attempting to bench press 150 pounds without first conditioning, it’s probably not. You must first become conscious of what you can financially lift.
There are two basic steps to become money conscious, know what comes in and know what goes out. Below are the two basic steps to become money conscious and how to implement them into your life.
Know What Truly Comes In
One erroneous mistake many of us make has to do with how much money we earn. We often think that if we earn $40,000 a year, we can spend $40,000 a year. Wrong! We forget taxes, health insurance and retirement savings – and we better have some because social security as we know it won’t last much longer. Many items are deducted from our paycheck even before we receive it, so the easiest way to determine how much we can afford to spend is to look at our pay stub – specifically our net pay.
Your net pay is the amount deposited into your bank account each payday. If you’re paid weekly, take that net amount and multiply it by 52 and then divide it by 12. If you’re paid twice a month, multiply the net amount deposited into your bank account by 2. The total of that calculation is your net-monthly budget or how much money you can spend on a monthly basis. For example:
- Take home of $437.50 every week = $437.50 x 52 / 12 = $1,895 per month
- Take home $1,700 twice a month = $1,700 x 12 = $3,400 per month
Know What Truly Goes Out
How much do you spend and on what? Do you even know? To become money conscious, first add up all your monthly spending, including your mortgage or rent, insurance, groceries, social life, car payments, clothes, etc. You may have to total a few months to calculate an average. Then, subtract this total of your monthly expenses from your net-monthly budget calculated above. If you have money left over after paying your monthly expenses, hooray!
What happens if your monthly expenses total more than your net-monthly budget? You have too many monthly expenses and you must make adjustments. Get your monthly expenses at or below 90 percent of your net-monthly budget. Here’s where you distinguish between wants and needs. No matter who you are, you can reduce your wants and this reduces your monthly expenses.
Find a simple way to track your spending. If that means daily or weekly totaling your spending on a spreadsheet, then do it. If you can only do this once a month, fine. Whatever money tracking habit you adopt makes you more money conscious of your spending and less susceptible to overspend.
Finally, create a debt-payment strategy. Use your net-monthly budget calculated above as the basis for calculating this strategy. Subtract 90 percent from your net-monthly budget to pay your monthly expenses. Use the other 10 percent to put towards your debt every month without fail.
When you’ve truly become money conscious, your expenses will be 90 percent or less than your net-monthly budget calculated above. You’ll have money left over every month to put towards debt after you pay your monthly expenses. This is how being money conscious can benefit you.
What we discussed above is only a small part of the first principle in 4: The Four Principles of a Debt Free Life. For more details to become money conscious and to learn the other three principles to live a debt free life, along with worksheets and a 12-week action plan, invest in a copy today.
With over 14 years of combined experience in financial services, Denver CO residents David Auten and John Schneider still found themselves with over $51,000 worth of credit card debt. With their self-made plan, they paid off their credit card debt within three years. Nine years later, they’re helping others learn to be debt free. To learn the three additional principles of living debt free, buy their book 4: The Four Principles of a Debt Free Life today.