Many people are trying to save money this year and pay down debt. We are no exception, last year we moved into a new house and this year I started a new business. 2013 is all about living well within our means, clearing that visa card and building an emergency fund. If it’s your goal to become debt free this year, here are a few easy steps to achieving it;
1. Cancel unnecessary payments
The first step is to begin living within your means, and that means cancelling all those unnecesary direct debits. I created this video on the fulfillment curve which will help you identify where your own satisfaction line is and what’s just fat that can be cut.
2. Spend less on luxuries and entertainment
Once you’ve watched the fulfillment curve video you will have a clearer idea of what is ‘excess’ for you. Stop wasting money and start doing more that brings maximum value. Erin enjoys Brownies which costs just £1.50 per week. Alex and Erin both have cinema cards which they get a lot of entertainment and value from. I usually qualify for a free meal at pizza express through my utility warehouse business, I also get the value of good conversation and networking. We also get orange wednesdays which we use if we all want to see something at the cinema. At home we’ve invested in a great coffee machine, and our new home is somewhere we’re happy to spend a lot of our free time. Our entertainment expenditure is pretty low and we get a maximum amount of enjoyment from a minimum amount of money. The key is to work out what you enjoy and how you can do that in the most cost effective way.
3. Create budgets
First create a spreadsheet for fixed costs like energy, phone, mortgage and insurance. Then create a realistic budget for food, petrol and all other ‘variable’ expenses. Do this by monitoring how much you spend and allocate a monthly amount for it. I also allocate money for car repairs (by approximating annual repair bills and dividing by 12) and savings for Christmas. I aim for my total ‘living expenses’ to cover all the necessities. I also round up all bills to the nearest ten to allow for a little overflow. This figure is allocated to a billing account before anything else. With what’s left, I allocate some for entertainment and the rest should go towards paying debt and after that an emergency fund.
The idea is that steps one and two bring your spending under control and you begin living within your means. Step three gives you a clear amount that you need to live and ensures that the important stuff is taken care of first. Everything that is left over should be plowed into paying off debt until you’re clear. I class ‘debt’ as any kind of loan, credit cards and overdrafts. I don’t class my mortgage as debt that needs to be paid off in this fashion. I don’t have a car loan but many people would choose not to include that either for the purposes of this type of program.
This for me is the first step to creating the life you desire. Debt does nothing but minimise your choices and freedom in life.