This is the first and most important step you will make on the road to financial security. It is also the hardest, because it means breaking the habit(s) of a lifetime and start to manage and take control of your finances.
What is financial security. Other than your house mortgage, or monthly rent payment – you have no other debts. If you do have other debts, then Recipe #1 is for you.
Typical debt that the average individual/family has include:
- Credit card
- Student loan
- Car loan
- 2nd mortgage (equity line of credit)
- Other loans
- Take out your pay stub, look at the final take home pay amount and make a note of that amount. This is your monthly “Money In”. If you get paid bi-weekly then multiply by 26 and then divide by 12. If you get paid weekly then multiply by 52 and then divide by 12.
- If you have deductions for 401k, or other retirement accounts, go to your company administrator tomorrow and put the retirement payments on hold (until we get to a later recipe)
- Download my free budget worksheet and input your “Money In” sources of income (include your partner and any other sources of income that you may have).
- Work out a detailed budget for “Money Out” each month. This is a very difficult task to complete and will take many days/weeks/months to get it accurate. Be honest with all the costs, and work closely with your partner/family to make sure you agree on the numbers.
- Calculate “Money In” – “Money Out”. This is your shovel – or $hovel and needs to be a positive number. If not, please read over the digging a hole blog.
- Now you have a number for your $hovel, or how much money you have to tackle the job of reducing and then eliminating your debt. Remember that you can increase the size of your $hovel by taking on additional work, or reducing some of your monthly payments.
- Work overtime, ask for a raise, get a side job in the evening (pizza or Uber).
- Go/eat out less, use food coupons, cook healthy low cost meals at home.
- Sell the car and buy a very cheap one.
- List all of your debts in order from smallest to largest, including the minimum payment needed.
- Pay the minimum on all the debts you have except the smallest debt. Use your $hovel to pay of that debt in as few months as possible. For example, a $2,500 debt with a $250 $hovel will be paid off in 10 months.
- As each debt is paid off, continue working your way through the list of debts until they are all cleared.
- Congratulations! At this point you are debt free and financially secure. You owe nobody nothing – doesn’t that feel good.
- Do you realize that your $hovel has increased simply by the fact you are not paying interest every month on all those loans – Powerful stuff!