Wednesday, March 14, 2012

Get Out of Debt! - Step 1: Know the landscape

Today, I want to help you get started on your journey of freedom from debt.  It is not going to be easy but the rewards of being debt free is well worth it.  Being debt free relieves us of unwanted financial stress and gives us the freedom to truly live life - to pursue our passions and dreams, and plan our future with clarity.  

Lets be honest.  What is holding us back from pursuing our dreams?  At the end of the day, it is the state of our finances.  If we knew that we had enough money to support the necessities of life (and our creature comforts), wouldn't we take the risk to start that business or take that trip around the world?

Its time to get started on building a better tomorrow!

Debt can be quite overwhelming and we often don't know how to get out from under it's grip.  Which debt can we pay off first?  Which debt do we pay off first?  What do we do with all these credit card debts?  Will we ever have enough money to pay off all debts?  What if we have an emergency and don't have enough money saved up? 

To help you get a better picture of your finances, you need a firm picture of your financial landscape - in other words, determine how deep a well you're in.  If you're ready to commit to being debt free, then follow these guidelines.

[Note: To help you, I've created a Google Docs spreadsheet you can access here.  Please save it to your Google account or download it before entering data.]

Step 1: Make a list of all assets

Include in this list everything you own that is of value and that can be sold (if necessary) to raise capital.  

Items in this list would be broken down into these categories - cash (ex. money in the bank),  investments (ex. stocks, bonds, mutual funds), and property (ex. houses, cars, jewelery).  For each asset, enter it's name (description) and current value.

Step 2: Make a list of all liabilities

Include in this list all debt that are not monthly recurring expenses (don't include expenses that you incur on a monthly basis - like your monthly utility bill).  

Items in this list would be broken down into these categories - mortgage, loans (ex. student loans, car loans, wedding loans, payday loans), credit card balances, legal & medical bills, and miscellaneous.  

For each liability, enter it's name (description), amount due, due date, minimum monthly payment (if applicable), and interest rate.

Step 3: Make a list of all revenue sources

Include in this list all monies that you receive on a regular basis regardless of whether it's weekly, monthly, quarterly, etc.  When entering your paycheck, make sure you enter the take home pay (after all taxes, 401K contributions, insurance contributions etc. are taken out).  

For each item, enter it's name (description), amount, frequency (weekly, bi-weekly, etc.), and revenue type (is it a fixed amount each time or is it variable).

Step 4: Make a list of all recurring expenses

Include in this list all expenses you incur on a regular basis.  

Items in this list would be broken down into these categories - home (ex. monthly mortgage payment, rent, association fees), utilities (ex. electricity, gas, phone, Internet), auto (ex. insurance, tolls, gas), loans (ex. monthly student loan payment, monthly car loan payment), legal & medical bills monthly payments, food & dining (ex. grocery, fast food, restaurants), entertainment, shopping (ex. household products, clothing), personal care (ex. hair cut, mani/pedi) and miscellaneous.  

Its important that you enter your recurring expenses in as much detail as possible.  For example, under food & dining, break down your expenses into grocery, fast food, restaurant etc.  You need this level of detail to help you tackle how you can cut your expenses and pay down your debts.

For each recurring expense, enter it's name (description), average amount, frequency (if applicable), expense type (is it a fixed amount each time or is it variable).

Step 5: Take a step back and review your financial landscape

Its very important that we capture all assets, liabilities, revenue sources, and recurring expenses.  Once you're confident that you've captured everything, sum up your total revenue and your total recurring expenses.  Hopefully your revenue is greater than your expenses.

Step 6: Rank your recurring expenses

In order to pay down our debts (assuming that we don't have significant assets that could be liquidated), we either need additional revenue sources or we need to cut our expenses.  [Side Note: I should send this post to Congress and the White House]

At a later time, I will post on how to increase revenue but for now, lets focus on identifying expenses that we can cut.  Go through the list of items from Step 4 and next to each item, mark it as either a necessity (ex. mortgage, rent, legal/medical bills), a good to have, or a luxury.  

I know that it can be hard to break your expenses down into these three buckets but its vital that you do.  Also, make sure that those things in the necessity bucket are truly those things that you must have or you must pay.

I hope this exercise was not too painful for you and that you will join me for the rest of the journey to financial freedom.

Stay tuned for my next post titled...

Get Out of Debt! - Step 2: Set Your Priorities
 
P.S. If you enjoyed this post, please leave a comment and help spread the word (post to fb, google+, twitter etc.)

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