Personal Debt Reduction

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Collecting the required information in order to make a comparison of your income and expenses will be quite revealing if you are like most people.

If you will do this comparison over an extended period of time…say a twelve month period, you will get a fairly good understanding of where your hard earned money is going and perhaps why you find yourself in the situation where your debt load has become overpowering.

The income side of the equation should be easy enough to determine if your wages are fixed each month. Also, it should be fairly easy to create a list of the fixed expenses such as rent or mortgage, insurance and other fixed monthly bills as the exact amount paid each month is known and will not change month to month.
Next estimate how much you spend on necessities such as food, clothing, etc. each month. Add this figure to your fixed expenses and call it total living expense. Finalize both income and living expense figures for a 12 month period starting in January.

The Bottom Line
Start the year by determining how much money you have on deposit at the bank then subtract the amount of debt you currently owe other than your mortgage, if you have one.  This is your beginning net cash reserve. Next add your income and subtract your living expense that you just finished calculating. Your net cash reserve will increase or it will decrease if your living expense is more than your income. If it is then you need to immediately reduce your living expense to at least match your income.  Now here’s the question…does your net cash reserve actually increase each year if your income is greater than your living expense? No?  Well, where is the all of the rest of the money going?
Make an attempt to calculate how much money you fritter away each week on totally unnecessary expenses. Nearly all who complete this exercise will find they have grossly underestimated the amount of money they spend each and every week.

Still asking – Where does all the money go?
Most often it is the small things that you don’t think would be worthwhile recording such as the cups of coffee you buy every day with the pastry that you add to it once or twice a week. How about the magazines you purchase every week or other “relatively small” expenses that add up with all of the other “relatively small” expenses to generate a rather big deficit in your annual finances?

If these small expenses can be cut back or eliminated this reduced spending will have an enormous effect on your ability to reduce and eventually eliminate your debt then remain debt free once you have achieved it.

This exercise will show you that many small expenses can add up to one great big debt.

Tags: Budgeting

This entry was posted on Saturday, November 21st, 2009 at 12:32 pm and is filed under Debt Reduction Info. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.