I have recent had the opportunity to coach a few people with varies financial difficulties. I won’t go into too much detail, but that all have two things in common. They had debt and didn’t know where to begin to get out of that debt.
In my initial conversations with someone I always ask a number of qualifying questions. I like to get an understanding of their current situation. A key for me is understanding “why” they want to get out of debt. If they can’t answer that questions, then I know they might not be ready to begin or simply just need help getting to that answer.
A particular couple, was eager to get started, so much so that they were looking to bypass some of the early steps and jump to automation. When I mentioned the word budget it was like I was insulting their mother with four letter words.
I knew right away they were going to present a unique challenge for me. I stopped with that line of questions and tried a different approach.
What do most people make before they go to the grocery store?
A shopping list.
What’s usually sent out prior to a start of a meeting, so everyone attending understands what’s expected to be covered during the meeting?
A meeting agenda.
What do football players study from?
Playbook (husband answered)
What do you need to build a house?
Set of plans.
What do all of these things have in common?
They help people get organized before they begin working on an activity or work better as a team. So if I now ask you what’s the best way to understand your finances, what would you say?
A budget.
You Don’t Know, What You Don’t Know
There are many different ways to track a budget. However, when you are first starting you need a blueprint for your money. You need to know how much money do I have coming in and how much money do I have going out.
This is usually done on a monthly basis as bills get paid monthly. Once you capture this data you can begin to build a plan from it. Are there expenses that can be cut? Are there subscriptions service we are paying for that we no longer use, etc.
Getting this information on paper give you the organization you need to begin to make changes with your money. It may take a few months to accurately get a handle on this information. Some bills get paid every two months or quarterly, or maybe they fluctuate each month and you need to average the cost.
Here’s a template as an example. Once you have your basic money blueprint captured you can move on to other things.
Next Steps
Once you have your money blueprint defined and understand all of your income and expenses, you can begin to take the next steps in your financial journey. Here are some tips and tools to use to help save time and organized further.
Direct Deposit – This is a straight forward one, saves time, allows you to automated where your money is going. Easily allows you to pay yourself first with a transfer to a secondary saving account. Why would you waste time and energy cashing a check?
Emergency Fund – Or the peace of mind fund. You need to have some type of cash saving for when life happens or Murphy come to visit you. A $1000 saving will cover must events and reduces so much stress and helps avoid money fights you will have no idea until you have the e-fund in place.
Wants verse Needs Test – All purchases can be put into one of these two categories a want or a need. It’s time to priority the expenses in your blueprint into these two buckets. Food and shelter are clearly needs, while the new 60-inch television or pair of shoes are clearly wants. I think you get the idea.
Receipt Tracker – I like recommending saving all receipts for two or three months and tracking all spending. Reviewing this will help identify any routines or leaks in spending that you might be unaware of. That daily cup of coffee, the convenience meal once a week, the impulse purchases at the department store, etc. These small unknowingly purchases could be costing you a good bit of money overtime and keeping you from your money goals.
Debt Snowball – The debt snowball is a debt reduction method where you owe debt on more than one account. You pay off the accounts starting with the smallest balances first while paying the minimum on larger debts. After the smallest balance is paid off, the payment is snowballed to the next smallest debt. This method helps build momentum. The Debt Avalanche method is where you pay off the balance with the highest interest rates first. Anyway you choose to pay off your debt is fine, as long as you are not adding any new debt along the way and adding as much additional money as possible to your repayment is the key.
DoBot – DoBot is a saving tool that connects to your checking account and analyze your income and spending. Over time it finds small amounts of money usually between $5-50 that it can safely set aside for you. The money is stored is a secure account and can be withdrawal at any time. This is a great tool to help increase your savings rate.
Final Thoughts
There are many different tools and approaches to tackling your debt. They call it personal finance for a reason. You need to find the best solution to fit your personal situation.
Just like I found out when coaching varies individuals, I had to tailor my approach to meet their needs, as there is not a one size fits all plan to getting out of debt.
What’s your recommended start point for gaining control of your money? What tips or tools would you include?
Brian is a Dad, husband, and an IT professional by trade. A Personal Finance Blogger since 2013. Who, with his family, has successfully paid off over $100K worth of consumer debt. Now that Brian is debt-free, his mission is to help his three children prepare for their financial lives and educate others to achieved financial success. Brian is involved in his local community. As a Financial Committee Chair with the Board of Education of his local school district, he has helped successfully launch a K-12 financial literacy program in a six thousand student district.
Getting a handle on my cash flow was the first step I took to take control of my money. And I did that with a basic Excel spreadsheet. I think they key is finding a tool that works for you and then being consistent.
I agree Kate. I’m still a fan of excel. I just like crunching my number myself.
I like the idea of a budget as a money blueprint. We really do use plans in the other areas of life where we want to be successful, so why not with our money? I know I got a lot better with my money when I started budgeting.
Thanks Matt. Even if you don’t consistently stick with it, you need it as a building block.
I think I’ve learned so much by expense tracking. If we hadn’t done that, I don’t think we would have changed nearly as many things as we have.
I will say a month long spending freeze was good for us too, because it made getting into the habit of tracking easier (less to enter) and helped point out some habits and spending triggers we needed to change. It also might give a jumpstart to saving for the e-fund or paying off a bit more debt.
A spending freeze is a good one. You just don’t realize some of those habits you fall into until you challenge them.
Tracking spending was incredibly eye-opening for me.
For us too Amy. Not much work to gain valuable insight.
It sounds like you have a gift for meeting people at their level and helping them move forward, Brian. The couple you mentioned is fortunate to have a patient coach like you. I’d be interested to read about how this couple is doing in a few months.
Thanks FSH. I will provide an update.
I can’t imagine where my finances would be without a budget! I think a good first step is expense tracking, because that tells you where the money is going now. Once you know where the money is going, then creating a budget helps you with a realistic next step towards change.
Agreed Gary. It’s a logical starting point.
It was definitely starting to track our spending that identified where we were just dribbling away our money on unnecessary purchases, except it was more of a gush, not dribble. The biggest reason we didn’t get there sooner was because Mrs. SSC didn’t like the tedium of saving all the receipts, entering them into a spreadsheet and tabulating them each month. I’m not blaming her because I wasn’t going to do it either.
Mint was awesome for us because it tracked everything and while it didn’t have the ultimate sorting capabilities Mrs. SSC wanted, it saved her loads of time each month, when we started tracking spending on a month to month basis.
I’m just saying this, because even someone as financially lazy as me can sign up for Mint and get a tally of where they spend their money each month and not get discouraged by the task of saving receipts. Especially if you’re not an excel fanatic, which I’m also guilty of not wanting to “excel everything” and I see it as another chore.
I love the blueprint approach and laying out the steps you mentioned. Like you said, each couple can tailor their plan to their needs and situation.
Mint, YNAB, Personal Capitol, and just heard a new one called Lemon. So many great tools that can help you track you income and expenses even for the “lazy” folks out there. :).
It’s great that you are able to help people get started down a better financial path, Brian! Thanks for sharing!
For me, tracking our expenses was the very first step (and it’s one of the main ways I still stay on track). After reading Your Money or Your Life, I also started evaluating our monthly spending to see how it aligned with our priorities and values. I also calculated how many hours of work each month it took to pay for each expense. This process has stuck with me and driven our path to financial freedom.
Thanks Amanda. You just illustrated how once you get the initial steps down how it can lead to other positive things. Thanks for sharing!
I also spoke with someone about a strategy to pay off debt, and although she was super keen, a big red flag was sent up when I asked her about the $1,000 mini-emergency fund to start things off. “Oh, I just want to get right to the debt repayment, so I’m skipping that part.” Sure enough, she completely gave up before too long.There are no shortcuts to debt payoff. And for people who have been spending unconsciously for years, it can feel like SUCH a burden to prepare a budget and to track. I know from experience.But those two things have been essential. No way around it.
So true Ruth. Shortcuts will only lead you back to where you started when it comes to debt.
It’s interesting to read what kind of reactions people have to the word budget. It is definitely taboo to some! I like what others wrote about tracking spending – and I agree that can be just as powerful as doing a budget (but many people need both). It’s hard to attack debt without a strong combination because of bad habits.
I know a couple who are in debt as well and when the husband says he mentions a budget, he gets the same response. I wonder why making a budget is so insulting. I think he said his wife’s response was that they work hard and earn a good living, that they shouldn’t have to deprive themselves…yet they find themselves in a lot of debt. I think you did a good job to put a different perspective on what a budget is.