Now that you’ve combined your finances with your partner (Rule One), it is time to get to work with your most pressing problem: your debt. The first step is learning to spend less than you earn.
Though this is the easiest concept to understand, it can be the hardest to master. In addition to being the hardest, it is also the most important.
Everything. Starts. Here.
That’s why we are going to start slowly and get it right.
Before we can get going on debt elimination, we have to plug the leaks in your boat. These leaks are the money you are spending each month beyond your income. And by income, I don’t mean your salary. Get used to thinking of your after-tax check as your income.
Some financial advisers want to push you quickly towards making a monthly budget. I believe you should wait and dedicate your first month to learning to spend less than you make, tracking your spending, and getting prepared to identify areas you can cut for major savings.
The easiest way to do this is to cut up the credit cards and live on cash. If you are used to living only on your credit card, you may not have enough cash on hand and it may take you more than a month to get “ahead” of your spending. While we are figuring out how to spend less than you earn, also build up a $1000 cash emergency fund. Focus on plugging the leaks first.
So for at least our first month of working towards a new financial life, we are going to avoid putting anything on credit, and pay cash for everything if possible. This is the only way you are going to train yourself to spend less.
Forget about the cash back rewards and airline miles from your credit cards. They are not worth it, and they aren’t working for you. Who cares if you earned $10 cash back by spending a $1000 on things you probably didn’t need? This is not “savings” or income.
When I say “use cash,” this means skip the debit card too. There are psychological benefits to holding your week’s worth of money in your hand and knowing how much you have left after each transaction. This is part of getting out of the mindset of card swiping, which seems to defer the pain.
With spending, we need to feel the pain each time if we are going to get better.
Dave Ramsey recommends an envelope system for your cash budget (putting a certain amount each week in a Grocery envelope, Entertainment envelope, etc). Remember, for the first month we are learning what system works best for us. You can just keep it in your pocket if you want.
Be Prepared to Fail
There are going to be times in the first month where you fail. You may overestimate or underestimate spending in certain areas. This is okay; don’t let it derail you. We cannot allow “perfect” to be the enemy of “good.”
Remember, we are just learning to spend less during the first month. We are learning about ourselves, our spending habits, and what it is going to take to turn things around.
Don’t forget to record every expense, no matter how small. I got into the habit of saving every receipt and entering them into a spreadsheet. You can also use programs like Mint to track spending on your phone.
[Note: If you want a copy of the spreadsheet I use to track my bills and spending, email me through the Contact page on the left hand sidebar]
Be Prepared to Succeed
In addition to failing, you must ultimately succeed. You may lose a battle, but you have to win the war. If you end the month by racking up more credit card debt or spending more than you earned, then you cannot move on to the next steps.
If you are serious, you have to repeat this month over and over again until you figure out how to spend less than you are taking in. You will never be able to pay off debt if you are adding new debt. This is also how debt consolidation works best, by not adding new debt.
Not to get ahead of ourselves, but we will be exploring in the upcoming 10 Rules posts ways to get big savings in our monthly expenses. Hint: we are going to aggressively attack your grocery budget and I may suggest you sell a vehicle or two. To prepare, discuss these ideas between the two of you and see what you decide. Even taking a loss on a vehicle and downgrading to a beater is a better choice than sticking with the expensive car.
As I said before, living on less than you earn is what will get you out of debt. You can proceed one of three ways. Spend less. Earn more. Or both.
Bolstering your actions by selling things you don’t need or getting a second job are big wins that will put you ahead of the game.
Either way, take it easy your first month and don’t put a lot of pressure or expectations out there. Don't try to do too much. We are figuring things out at this stage. But make sure you remember to succeed. Even if it takes two months to get your family on track, once you are there you are officially suited up for the game. If you aren’t able to spend less than you earn, you are still in the locker room and the game is going on without you.
To recap, your goals for your first month, Spend Less than you Earn, are:
Goal 1: Live on cash and have money left over at the end of the month.
Goal 2: Track all your expenses and make sure to pay all your bills on time.
Goal 3: Discuss big moves to free up money (second job, selling a vehicle, etc)
10 Rules to Eliminate Your Debt and Change Your Life
10. The Goal of Work is Retirement