What is Financial Management?

Most high schools across the country now teach a required course on personal finance. For those of us already graduated, however, it is too late, and if we have not been taught by parents, the world of income, expenses, savings, and debt can be a treacherous path. Managing finances is not difficult, but it will take some self-education, some serious planning, and a commitment to becoming debt free permanently. For effective elimination of debt to occur, you must follow an organized process, looking at options along the way.

The Budget

If you don’t have a budget, you are already in trouble. You don’t know where your money is going and you don’t know if your spending is going to result in trouble. The process begins with you writing down every single penny spent in a month’s time. You will then organize your spending into columns, beginning with the necessities. These are your regular bills and expenses that are required for you to live and work – rent or mortgage, utilities, car and insurance, gas, groceries, personal items, credit card and other revolving debt payments, etc. Nothing that is not an absolute necessity goes in this column. The next column are things that are not absolute necessities but which you normally spend on – the big cable TV package, perhaps a bowling league, a once-a-month lunch out with a friend, gifts for friends or relatives, etc. The third column is reserved for the “junk” spending – those goods or services which are luxuries and without which you can easily exist. Going to the nail salon, ordering pizza delivered, or stopping for the bacon/egg/cheese biscuit every morning are examples of such spending. These are the first things you are going to cut out as you earmark more money toward the elimination of debt, so wave good-bye to them and tell them you’ll see them again in the future.

What’s the Verdict?

Once you have listed all of your spending for a month, subtract that total from the actual net income you have. If you are in the hole, you may have to eliminate more than just column three. If you have disposable money after you add columns one and two, then eliminate column three and use that money be begin paying down your debt. If you want to achieve your financial goals faster, you will eliminate both columns two and three and do without the non-essentials. If you eliminate columns two and three and you are still in deficit spending, you have a more serious issue and will need to pursue some more aggressive solutions, which are listed later.

Step-By-Step, the Debt is Eliminated

Looking at your credit card and revolving debt, list the debt in order of total amount, beginning with the lowest balance first. The “war” begins with the first debt. Every bit of money you have accumulated from eliminating expenses will go to this debt, every month, until it is paid off. If at all possible, pay this amount as soon as you receive the bill or set up automatic payment from your checking account. First, you will not be tempted to spend it on anything else and second, the quicker you pay it, the more you reduce the remaining balance upon which interest is charged daily. As soon as the first debt is paid off, go on to the next. Any windfall cash goes to the debt. With each payoff, celebrate. Use a bit of the disposable income for a great night out or to purchase some item you have been coveting. This is your reward and will serve to keep you motivated.

When You are in Over Your Head

If your debt cannot be paid in conjunction with your essential expenses, you need to take more aggressive action, in the form of debt consolidation, or, worse, bankruptcy. Before you take these steps, however, contact a nonprofit consumer counseling agency in your area and discuss your situation with a professional. If bankruptcy is the option you choose, select an attorney with a solid reputation.

After The Debt is Gone

It will be a wonderful relief to have all of your “bad” debt eliminated. You will feel a freedom that comes with knowing that you are independent of creditors who charge high interest for items and services which are long gone before you have finished paying for them. It will then be time to establish a new budget and a new set of goals and benchmarks, which include paying cash for all consumable goods and services, saving and investing for a financially secure future, and planning for the lifestyle you have earned.