Credit cards and loans are great.
They give you access to things you usually couldn’t afford out of pocket — a new car, a home, an entertainment center, an education.
Then life gets in the way.
You owe minimum monthly payments for all your loans. That’s on top of the necessities like utility bills and groceries.
The interest rates add up in front of your eyes, and now you’re among the 87% of Americans in debt.
It’s time to pull yourself out of that financial rut and get back on your feet. Here are five steps to regain control of your finances.
1. Start Crunching The Numbers
You’ve been racking up bills and interest without a care in the world up until today. But now, it’s time to take a peek at where you stand financially — just how bad is it?
Whip out your calculator, log into your accounts, and gather your latest bills.
Do you know what your take-home is each week? Hopefully.
To find out, take a look at the most recent pay stub from your employer. What you’re looking for is your “net” income. Which will tell you how much ends up in your bank account after taxes and deductions come out.
Now, multiply your weekly wages by four to see about how much you make a month.
Keep that number in mind.
Now, you need to figure out how much is leaving your account every month. So subtract the following monthly costs from the number you just calculated.
- Mortgage or rent payments (including HOA fees)
- Car payments
- Utility bills (water, sewer, gas, electric, etc.)
- Cable, phone, and Internet bills
- Groceries, clothing, and other necessities
- Insurance (car and health)
These numbers represent the expenses you need to make each month to keep a roof over your head, food in your stomach, and your family healthy.
And Now For the Ugly:
Subtract the monthly payments for the loans you currently have (car, mortgage, college, etc.) and how much debt you’re paying off each month.
Are you in the red? Hopefully not!
2. Set A Monthly Budget & Spending Plan
Alright, it’s time to start digging yourself out of this dreaded financial mess. You want more going into your savings account and less coming out of your checking account.
Get ready for a crash course in financial planning!
The general recommendation is to spend 50% of your income on bills and necessities (like rent and groceries). Another 20% should go right into your savings account. The final 30% goes to whatever makes the most sense to you for that month.
This 30% is your safety net in case the dishwasher blows or your car breaks down. That way, you don’t have to eat into your savings account or have to pick and choose which bills to pay for the month.
So let’s say you make $3,000 a month.
With that, here’s how you should divvy up your income during the month:
- 50% to the necessities and bills: $1,500
- 20% to savings: $600
- 30% for whatever: $900
Try to hold to these guidelines as often as possible to see the best results. But understand that some months are different. For example, you may owe a little more in electric bills during the summer if you’re blasting the AC.
3. Prioritize Paying Off The Necessities First
Slacking on paying your bills and loans will only add to your financial turmoil. Each payment missed tanks your credit score, racks up interest, or worse.
It’s time to figure out how you’re going to repay what you owe.
What Gets Paid First?
When you’re considering which bills to pay first and which can wait, ask yourself this, “What happens if I don’t pay this bill on time?”
Late on a mortgage payment or rent? Foreclosure or eviction.
Missed utility bill? They turn your electricity or water off.
Behind on car payment for a few months? Repossession.
Don’t buy groceries for the week? That one’s obvious.
Mortgage and rent, utility bills, medications, and groceries should always come before paying back any other loan or debt that you have. This may rack up interest, but it’s better than going hungry or making your living situation unstable.
Which Loans Should You Pay Off First?
This one can be tricky, and there are a few theories on which method is best.
For example, you may want to pay off high-interest loans first. That way, you’ll cut your losses and avoid paying back more in interest than the loan itself. But if your debt is huge, it might feel like you’ll never pay it back at this rate.
Or, you can pay off your smallest accounts first. This is an excellent idea if you’re down on your luck and want to see proof that you can pay off your debts and make progress! There’s nothing more satisfying than bringing that balance down to $0.
Also, consider using your 30% discretionary funds to pay a bit more into your debt.
4. Consider Downsizing Or Refinancing
To help yourself out of this rut, you’ll need to start slowing down on your monthly spending. You’re living well beyond your means, and now you’re paying for it.
Are you ready to downsize and refinance?
Then think about your current spending on the following:
- Car Payments: Do you really need that brand new Mercedes with auto-drive features? Or would a four-year-old used Toyota get you from point A to B?
- Rent & Mortgage: Is there really a need to have a four-bedroom home if you live alone? And do you need to live in a townhouse with a hefty HOA?
- Gym Memberships: Should you be spending $50 a month on a gym membership you don’t use? Or, could a dumbbell set work just as well for now?
- Subscription Services: Do you really need Amazon Prime, Hulu, Netflix, and Disney Plus? Or, can you chop that down into just one? Can you replace your $100/month cable bill with one of these services?
You don’t have to get rid of these things entirely, but instead, find more affordable ways to get what you need and want.
Refinancing is also a great option, especially if interest rates are unusually low.
Consider consolidating your credit card debt for that same reason. You may be able to turn five smaller credit card bills into one larger one.
5. Keep Track Of What Goes In & Out
Things are finally getting better in the world of money, and now it’s time to stay on the right path as you get your house in order.
It’s now up to you to monitor your finances with an eagle eye.
And there are plenty of apps for that.
Mint is an awesome app for personal budgeting and to keep track of your spending. This nifty app brings all your finances together. So you can keep a close eye on what’s going in, what’s going out, and where you stand financially.
You Need a Budget is another cool app that’ll teach you how to budget your money, with many users cashing in on an extra $6,000 in savings in year one. You can plan out financial goals, and the app will help you stick to them.
Either of these apps is terrific for visualizing your spending and savings for better financial status.
Plus, you don’t need to record your expenses by hand or through Excel spreadsheets. Some popular budgeting apps will automatically sync with your bank accounts to do this for you.
Once you dig your way out of your financial rut, you’ll never want to find yourself in that position again!
So to stay on a sound financial path, think about the following:
- Creating and sticking to a budget
- Limiting how much you spend via credit card
- Calculating the numbers for future large purchases (e.g., house, car)
- Asking yourself, “Do I really need this?” before buying pricey items.
It’s entirely possible to free yourself from the vices of debt, so long as you put in the effort. Every bill or loan you chip away at is progress!
Adam Marshall is a freelance writer who specializes in all things apartment organization, real estate, and college advice. He currently works with Copper Beech at Greenville to help them with their online marketing.