Step 2: Know How Much You Owe
Surprisingly, tons of people have no idea how much debt they have. They owe money to so many people that they can’t even keep track!
It’s important to know the exact amounts you owe to each lender and tally them up.
First, if you don’t know where to start, go back and look at your bank statement. This should tell you where your automatic payments go every month.
Next, go to the websites of each of these and try to find your login information. If you forgot your passwords, try contacting the company to reset your login credentials.
Once you have access to your information, get out a sheet of paper and list your debts (besides your home if you have a mortgage). It could look something like this:
- Car Loan with Wells Fargo – $6,000
- Hospital Bill – $600
- Discover Card – $1,500
- Student Loan – $7,000
- Capital One Card – $3,000
After you list them, write out the total. In the example above, we have $18,100 in debt.
Wow, that’s a tough number to see! But you need to have full awareness of your situation. Otherwise, your debt will continue to grow and you won’t make any progress.
Step 3: Budget Your Monthly Expenses
Do you know what the secret to paying off debt? Budgeting. Yes, doing a monthly budget is one of the biggest factors to your success.
But why do a budget? To put it simply, a budget lets you tell your money where it needs to go. It allows you to plan for your long-term and short-term goals, holds you accountable, and ensures you have money to meet your basic needs.
YOU NEED A BUDGET! There are no ifs, ands, or buts about it! Without a budget, your money WILL DISAPPEAR AT THE END OF THE MONTH! And you won’t know where it went!
So, let’s start with just your basic monthly expenses. And don’t worry, later we’ll talk about making sacrifices so you can make real progress on knocking out your debt. Here’s how you do a simple budget:
1. Write out your monthly income
You need to know how much you make each month. To do this, take a look at your pay stub at work.
Also, consider your pay frequency. Do they pay you twice a month? Every two weeks? Every week? However much you bring home, that’s how much you budget for.
You’ll also need to include your spouse’s income, if applicable. After all, you guys are in this together! (Or at least you should be).
2. Take a look at your basic needs
There are things we want, then there are things we need. Before anything else, you need to plan for four things:
- Food: You need to eat. Eating is essential for life, therefore it’s essential to your budget.
- Shelter: You need a place to live so wild animals don’t come and eat you in the middle of the night.
- Transportation: You need to get around so you can get to work and make more money.
- Utilities: You need to keep your lights on and your water flowing.
Dave Ramsey often refers to these things as the “four walls”. That’s because these four things come before anything else and are essential to your livelihood and your well-being. Therefore, they come first when it comes to your budget.
3. Look for your fixed expenses
Now you need to go back to your statement and take a look at any recurring expenses. These can include things like your gym membership, internet, subscriptions, insurance, and so forth.
And yes, we’ll talk about cutting some of these things, but that comes later. For now, we’re just looking at where your money goes every month.
4. Plan how much you’ll give
I’m a big advocate for giving, regardless of your debt situation. If you’re part of a church, I strongly recommend tithing.
And if you’re wondering whether you should tithe while you’re in debt, I’ve got good news! I wrote a whole article on this.
Even if you’re not a Christian, I still strongly recommend giving to something you believe in. This sets a pattern of generosity for later.
5. Write our your minimum debt payments
For now, just write out the minimum payments to see how much of your paycheck each month goes to your debt. But don’t worry, soon, we’re going to take a look at how you can start knocking out your debt.