Financial Friday – Getting out of debt. Pt1

Our finances are one of the biggest things that stress people on a continuous basis. With big banks and corporations making decisions that can result in prosperity or financial disaster we need to understand how to survive the bad times and thrive in the good times. Where do we start when we are trying to take control of the financial side of our lives?

Set a goal

With anything that we really want to change or improve we have to start by setting a goal. Something to get motivated, to get you out of bed in the morning and take on the world. So what sort of a goal is reasonable to start with. “I’m going to be a millionaire in three years.” Yeah sure that’s reasonable if you have six figure income and just have to control your spending, but for most of us that’s just not reasonable.

A reasonable and very much achievable goal would be, “I will stop being stressed about my finances in six months.” This statement is much less scary and doesn’t have such a pin point target. and even better way to put it would be to say “I will be stress free financially in the next six to twelve months.”

You should create your own target that is within your vision of the future but the key things to have it the statement are “I will” not “I want”, a non-figure based goal and a general deadline but not a fixed date.

The “I will” makes it affirmed that you believe you can achieve it. The goal should be something you genuinely believe you can achieve and you shouldn’t put a defined date as we don’t really know what the future holds and setback happen to everyone.

Write this goal down on a piece of paper. Make it really in from of your own eyes.

Some other examples of goal statements could be;

  • I will save so I can send my kids to whatever college they want to go to.
  • I will make sure my parents are looked after and get the best health care.
  • I will save and buy my first home in 2-3 years

The first two statements have people involved so the timeline for these goals are dependent on the age of the people in question. Be vague about a time but make sure to add one for the motivation.

Once you have set your financial goal its time to take some sort of action to pursue it.

Make sure your at least able to float.

Let’s start by making a few assumptions of where we’re starting from. Your circumstances may be much better or worse than the assumptions about this fictional person but the first stages of taking action will be the same. Let’s assume:

  1. They have student loans and growing credit card debt.
  2. They have a full time job.

So this person has a full time job and debt that seems to keep growing because they’re living paycheck to paycheck paying for rent, electricity, internet, food and all the essentials needed for survival. They also have a healthy social life and love to go out and spend time with friends and enjoy life.

Let’s set the goal for this person as they will be debt free in two years. Seems a bit long but they have big student loan debt.

Start by getting a pen and paper. If you don’t have one then get out and go buy one. This is an investment that is more than worth the few dollars a notepad and pen costs.

Start by simply writing down your income. Add it up to see how much you earn in a year. Its probably more than you realize.

Our example person is as follows:

Weekly pay after taxes: $350
350 x 52 = $18,200 per year

So the example person has $18,200 as they’re current income source to survive the whole year with.

Next write down your essential living expenses of rent, electricity, internet, food, water and phone. Anything else isn’t an essential cost for your survival. Now subtract this from your income and look at how much is left over. If your essential cost of living is more than your income one of two major things need to happen.

  1. You need to get a promotion or a different job that pays more. Unless you are working on your passion do something different. If it is your passion you need a second job or form of income. Main thing is you need to earn more money.
  2. You need to change your lifestyle. If you live in a luxury one bedroom apartment the cost the same as you paycheck, you need to move out and move into a share house or back in with your parents until you get a bigger income. Or if your already in a share house you need to look at your utility providers and see if you can find a cheaper provider or maybe see where resources are being wasted in your home. Start buying your groceries in a discount store and not buying all the name brand items in the luxury stores. Perhaps you need to ditch the newest iPhone and settle for a older model that doesn’t have as high of a plan.

Which ever of these options you chose to take if your essential living costs is more than your income you need to make radical changes immediately.

Our example person is as follows:

Rent:
$800 per month = $9,600 per year
Electricity (includes electric heating):
$500 per year
Other utilities (Internet, bins etc…):
$600 per year
Food:
$100 per week = $5,200 per year

Income minus essential living expenses = $2,300

This example person is in a share house where they are sharing the bills, your situation may be completely different.

So after this initial analysis our example person is able to float and aren’t completely drowning. But if they were in the negative then they may be likely to end up homeless or starving which means they probably need to move house or back in with their parents if they weren’t expecting a pay raise soon.

What is your lifestyle costing you?

Once you have your essential living cost to be less that your income, or if they already are lower, its time to get back out that pen and paper. It’s time to look at all the other expenses in your life and are they really worth it.

Write down all your subscriptions such as Netflix, Spotify, Disney+, World of Warcraft, etc… . Whatever it is write them all down and be thorough.

Next write down your social expenses, Friday night pints with the lads, cocktail Saturdays with the girls, Wednesday date night, Sunday brunch with a friend, etc… . If its something you do regularly or once per month write it down. Write down how much you usually spend (this doesn’t have to be precise but be as accurate as you can be).

Finally write down all the little luxuries and treats that you give to yourself. That glass of wine after work, that Starbucks coffee for lunch, bags of crisps, chocolate bars, the newest video game, whatever it is declare it and put a price on it.

Our example person is as follows:

  • Netflix $12.50 pm $150 pa
  • Spotify $10 pm $120 pa
  • Disney + $10 pm $120 pa
  • Friday drinks $20 pw $1,040 pa
  • Sunday brunch $40 pm $480 pa
  • Morning coffee $25 pw $1,300 pa
  • New clothes $150 pm $1,800 pa

In total this adds up to $5,010 and this is not a very detailed list. Already we can see exactly why our example person has a massively growing debt rather than paying off those student loans and credit card bills.

Don’t put yourself under too much pressure.

Alright this is already a massive step and you may be feeling more stressed than ever because you may finally realize the situation you are in.

Take a few deep breathes and know that most people are having financial difficulties. We are going to tackle this giant problem one step at a time and get you to the life you want.

Summary

After this exercise you will fully understand your financial situation. You have set yourself a goal to work towards and taken the first step towards getting there.

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