Debt causes stress, anxiety, insomnia and countless other mental and physical problems to people everyday. I know this to be true, because I used to be one of them. I spent my days worked up over how much money I owe and how no matter how much I give them the balances just never seem to go down. I though that I was going to spend the rest of my life living paycheck to paycheck until the inevitable day comes where I can’t work due to an injury or illness, or even retirement, and it would all come crashing down on me.
You need to start with a list. Get a piece of paper and a pen, go ahead I’ll wait. Back? ok good.
Start by rounding up all of your bills. All of your monthly obligations like credit cards, loans, utility bills and anything else you owe to anyone, anywhere, from anytime.
Now list them on the paper in groups. Start with credit cards, then loans etc.. until they are all listed. Add next to each, the following information if applicable:
- Total balance
- Monthly payment
- Interest rate or APY
- Due date
Now add the numbers up to find out:
- How much you owe overall
- How much you pay out every month total
Now you know exactly where you stand with debts. At this point you may be a little overwhelmed. Don’t be. At this step I owed over $40,000.00, which was a bit more than I expected. But As you continue you will see how this will be paid off, and the initial shock of what you really owe will fade.
You need to know the difference between an Expense and a Liability. For your personal needs, consider an Expense to be any amount of money you have to pay out each month to maintain your lifestyle. These include rent or mortgage payments, utilities, car insurance, food and entertainment(yes, you have to add it up).
A Liability is something that you owe, things that can’t be canceled or given up. In other words you have no choice but to pay it. Under this category you should add things like credit cards, personal and student loans and past due bills for services you no longer receive like hospital bills or that pesky BMG music service that just keeps billing you for crap you never wanted anyway. Notice, although a mortgage is a loan, and a big one at that, it goes under Expense and not here.
Now take your newly created list and turn it into a newly created worksheet. Separate the Expenses from the liabilities and put them In two side by side columns along with the interest rates, dues dates, monthly payments and balances. Add the amounts of your Expenses and write the total below them. That’s how much money it costs you to live each month. Now do the same on the Liabilities side. You now have a total amount of debt owed, and how much that debt is costing you a month. Further down the page, add the monthly columns together and label it “Total Expenses”, we will come back to that later.
Let’s talk about the money coming to you instead of away for a second, I’m speaking of course of Income and assets. Income is the money you make from a job. Yeah I know I’m not telling you anything new there, but the reason you need to know that is to differentiate Income from your assets. Assets are things that produce money, without you having to be around. Rental properties, Stocks, Bonds, companies you own, intellectual rights, Interest bearing accounts, annuities….you get the picture. This is money coming in to you each month that you don’t really have to ask for, it just comes.
Get a new piece of paper, because you are going to create a list now of all of your Income and your Assets just as you did before for your Expenses and Liabilities. Add your Income from your Job(s) on one side, your assets on the other and get your totals down to the bottom of the page and label it “Total Income”. You should now know how much money you make every month and what your total assets are.
Time for the big picture. Take Your “Total Income” and bring it to the first page. Slap it right on top of your “Total Expenses” and do the math. Label that new number the “Difference”.
Now you have the clearest idea of your finances you’ve ever had right? You know how much money is coming in, going out and where and when it does. That’s it for todays exercise. Next I’ll show you what to do with your new found Information, until then Go read a book.