The majority of American's live pay check to pay check. The vast majority of millenials and Gen Xers have massive debt and less than $1000 in savings accounts. Statistics show that most Gen Xers don't even have a retirement plan. As millenials we are faced with not only paying for our debts, but we will also be responsible for taking care of our parents when they can no longer work. What then? Our personal debt is a crisis and we should be treating it as a life or death situation.
Lets get real here people. Nobody likes debt. Unfortunately it's something the majority of us have looming over our heads day in and day out. The mass amount of consumer and student loan debt we've all accumulated is outrageous. Something has to change and it has to start with us.
I like to refer to student loans as the "debt sinkhole".
You know, where everything goes in but nothing is ever to return? I felt like that about my student debt for a long time. I couldn't see the light at the end of the tunnel, much less how the hell I was gonna get myself out of it. It was debilitating on so many levels. I didn't feel like I was good enough to get my dream job, much less even find the confidence to apply.
The "debt sinkhole" as I like to call it is the root cause of SO many underlying issues. It's probably the reason some of us aren't applying for that dream job, and why we are letting our biggest of life's desires slip through our fingers; working a job we hate because it pays the bills. It's possibly why we can't keep a stable relationship, because OMG if they found out about it, and this list goes on...
My debt became embarrassing.
How did I even get myself into this mess in the first place? I felt like I had committed financial suicide. It’s not like I could file for bankruptcy. Cause...Guess what, guess what? Filing for bankruptcy won’t eliminate your student loans. So here I am stuck with this ball and chain until I’m nearly 50. Ummm no. I was done. I had had it with Sallie Mae, Navient and all the rest.
I made a few lists. Lists of life goals like traveling, having more time for my creative endeavors, starting a company. None of those things were very viable options, because I was always focused on what I "had not" and debt was always on my mind. Once I decided I was done, sooo done, something changed. I started asking different questions. It wasn’t: What am I gonna do? It became: How am I gonna do this bish? My mind set changed about life in general.
So I made some more lists.
I made lists about what made me happy, what skills I had, what I was grateful for. I turned the "had nots" into "I am grateful for what I do have". I changed my focus. I began focusing more on what made me feel alive; what I was grateful for. I made it my intention to be grateful for something each day and put my focus on what I could do right now, in this very moment, not on what I could have if.
If you change your mind you will change your life!
Being present in your own intentions and in your mind will allow you to be present in your life. You see changing your focus and how you view things can change your experience. Once you overcome your own mental barriers you are taking the first steps toward achieving your goals.
For me my focus wasn't on monetary value. It was about what I could do for my family, for other people, for the world. I stopped really caring about things and started caring about experiencing life. I stopped the unconscious consumption of goods. I just didn't give a rats booty any more what all my fashion blogger friends were buying at H & M that week. For a fashion major this is weird! Once I realized all of those things that we all buy to impress everyone else didn't really matter to me I started setting goals for myself.
Setting a direct intention with a due date tricks your mind.
You can't reach a goal without first setting an intentional action plan. So, I created some more lists (I'm a big fan of them if you haven't noticed already). Setting a date and looking at it daily will force you to remember your goal and work toward it. This will force you to get it done. I set a goal for myself to pay off 100k+ debt by the ripe old age of 30. However realistic or unrealistic it is, I'm on the count down. Can I do it? I'm determined to.
I created an action plan.
I've read countless blogs on all the different ways of paying down debt. For me I knew that I wasn't just going to be able to work with the snowball method. I knew if I put all my debt into one big ol' list over whelm was bound to set in. So I decided I would categorize my debt into phases. I have 5 phases. Each phase has a different type of debt, a different goal, and a different due date. You can read more about that in a future article.
The biggest hurdle of this whole debt thing was actually getting started. It's pretty damn hard to do a complete overhaul on life and your spending habits. It doesn't happen overnight. You have to be patient with yourself. You have to remind yourself that it will be worth it in the end, and your setting yourself up for a better future by paying it all off early. The toughest part I think is believing in yourself that you can actually do it. Trust me on this one: believe in yourself, and start before you are ready!
Changing my mindset got me one step closer to kicking debt in the a**.
My spending habits changed because my focus was on my friends and family and experiencing life rather than buying things that filled a void. Once I started focusing on the positive aspects of my life, I started believing in myself more. I realized my life was whatever I wanted to make it. I realized that I was in fact perfectly capable of doing all of the things I want to do in life and I was the one holding myself back from it all.
Things can only do so much for you. They can never do for you what you could do for yourself. They can only fill a void for so long. I urge you to be more mindful of your spending habits, and give your debt a due date. In changing how you think about money and things or really just life in general you are one step closer to unlocking your true potential in life and having a better relationship with money.
Are you with me? I’m sure if your reading this you’ve been there or you are there. But…there’s hope, because if you can crack your limiting beliefs about yourself and your life, you are one step closer to freedom. So let me ask you this... What is stopping you? Why are you letting your dreams slip through your fingers?
Are you constantly questioning why you’re always broke? Do you want to ditch the paycheck-to-paycheck lifestyle?
I have one word for you friend, budget!
A monthly budget will help you stay on track and allow you to plan how you will spend and save your money each month. It seems like a really simple concept, and it is, but all too often I see people who have no idea where their money is going.
Maybe you’re great with your money but just have a big savings goal and want to see where you can improve your finances to meet said goal. Maybe you’re in a massive amount of debt and want to have the freedom to travel whenever you want or buy those new shoes you’ve been eyeing at Neiman Marcus. Whatever your reasoning is, you have to start somewhere.
Budgeting is the first step to revolutionizing your spending and saving routines. Ultimately creating a budget will show you where your money is coming from, how much is there, and where it is going each month. Since you're just starting out you'll need to create a "pre-budget" and a "working budget". I call it a pre-budget because you are basically analyzing your income vs. expenses over the course of previous months to come up with realistic numbers that will make your true budget/working budget.
You can download my budget template here.
1. Gather all of your financial statements and Organize.
I don't really do things like most financial advisers would probably tell you. When I first started budgeting I looked through all of my previous bank statements and credit cards statements. It's really the best place to start in my opinion. With that said, you need to look at your spending for the last 3-4 months first.
Gather up all of your financial statements i.e. receipts, bank statements, credit card statements, student loan payments. Put your spending in categories. I live in my spreadsheets (I know, I know...) and categorize my spending by the following:
- eating out
I leave certain things like rent, and gas as a separate category because for me it's not an expense that I can lower. I also like to know how much I spend in gas a month because I have a long commute to and from work, and that's not gonna change anytime soon. This comes in handy later, promise.
2. Make a "Pre-Budget" listing all of your expenditures
What is a "pre-budget"?
Basically it's your budget that shows your spending habits over the last few months, before you create your working budget. I like to create a pre-budget because it's a huge eye opener and it shows you point blank exactly where your hard earned cash has been going.
I find it helpful to make a spreadsheet for this exercise; to make it easy you can download mine here.
Along with categorizing your expenses you will also want to make separate tabs in a spreadsheet for the month you are logging. For instance, I have a separate tab for Jan, Feb, March, April, etc. Make sure you include a space at the top of your sheet for your monthly income. You'll need to compare your income to your spending at the end of this exercise.
3. Total Your Monthly Expenses
I've listed my categories above, but you can always customize them to your personal preference. If you have spent money on it, then it needs to go on your list. The purpose of this is to see the broad spectrum of every place that your money has gone. If you don’t know what your spending your money on you really can’t set up a budget for yourself, or decide what you can cut in your spending habits. Doing this will quickly get you to the root of your problem and likely make you realize just how much your weekly trips to Starbucks are costing you.
Now I want you to total all of your categories separately. This always seems to be the most eye opening for people, because we don't realize how many times we spend on things that we really don't need. My guilty pleasure is definitely Dr. Pepper at the drive through. Whyyyy? The first time I did this, I was floored. I had a moment like holy he** I spent that much on eating out?
4. Record your sources of income
Once you’ve put together your expense report from last month you need to then look at your income. How much hard earned cash did you bring home last month? I get paid bi-weekly at my day job, so for my first income report I logged the two paychecks I brought home that month.
I also put any additional income onto this list. I log any additional income I recieved in the month I'm logging. I have a few side hustles (one being this blog), so I log that income as well.
Once you've entered all of your expenditures, total your monthly spending. Is your monthly spending higher than your monthly income?? If so, don't sweat it, that's why you're here.
5. Compare your income vs. expenses.
Here comes the fun part. Compare your income vs. expenses. Hopefully your income is more than your expenses, but for most of the world it’s not so don’t panic! At this point you can prioritize your money and make some changes. My biggest priority was and still is paying off my small consumer debt and my astronomical student loans. I want to be 100% debt free.
Want to learn tips to cutting expenses, read here.
6. Analyze your pre-Budget
Now that you've totaled your expenses look through your categories in your pre-budget. Some are necessary expenditures and some are frivolous, meaning we really don't need them to survive. Leaning the difference between need and want will play a major factor in your debt pay off journey.
Your Rent/Mortgage is more than likely not going to fluctuate, but other categories might. Are you spending more than you earn? Look at your categories, your eating out and entertainment habits might be to blame. Look for expenditures you could do without like cutting cable, or eating out once a month instead of every other day. This will help you create a realistic working budget.
7. Make adjustments to Your expenses and decide which are fixed or variable in your working budget
If you have more expenses than income, then you just need to make some adjustments. This is where you need to decide between what your fixed expenses and variable expenses are. Fixed expenses are things that are non-negotiable spending such as Rent and Utilities. Variable expenses are those that you may or may not have every month, like those shoes you bought last week or the Chick-Fil-A you picked up on your way home from work.
In the last part of this exercise you identified categories of spending you might be able to improve upon. When I created my list of expenses I realized the majority of my spending was coming from food, eating out and getting meals on the go, because hello we live in the 21st century and we are ALWAYS busy. Am I right?
I realized I could cut at least $200 out of my expenses if I started cooking at home and prepping my meals. Everyone talks about meal prep but WOW does it save you money when you are always on the go. Rather than running through Chick-Fil-A you can make a meal at home that is not only less expensive but healthier for you. It’s a win, win.
8. Create your working budget
Now you get to create our real working budget. This is the holy grail of starting your debt pay off journey. Where should you start when creating a budget? You really need to base your budget off of something; so first lets take a look at last month’s spending.
You can’t realistically just pull numbers out of the sky and say okay that’s my budget, because some things cost a lot more than we realize. This is why I have you create a pre-budget for a few previous months so you can compare spending month to month and identify holes in your budget.
When I first started my budgets I looked through all the categories that I could possibly improve. I decided I could cut out cable that was costing me $40 a month and just keep the internet. Check! I decided by eating in I could save $200 a month. Check!
I thought about how much I needed for utilities based off the last few months for things like utilities, rent and gas. Then added money to those categories if needed. For instance I moved $20 of my grocery budget to gas because for me I really prioritized being able to go to and from work without feeling strapped.
Your working budget needs to be realistic and reflect the changes that you can make to improve your finances. You can't just cut your electric bill in half (well most of us couldn't do that). However, if you can drastically cut your expenses then you should start saving and paying off debt.
Related Post: 6 Tips for Saving, 10 Tips for Paying off Debt
I always knew about budgets, but I never really knew how to use them effectively. That seems to be the general consensus of most millenials, since personal finance was pulled out of our schools education tracks. We can’t really blame ourselves. This problem didn’t start with us, but it can end with us! We just first need to evaluate our needs vs. wants and what our values are.
I can’t stress enough how important it is to check yourself before you wreck yourself. When I first started out on my debt repayment I would be really gung-ho for a couple months and then I would start to slip off and not pay attention to my budget. Budgets are such a valuable tool and you need to revisit them on occasion to make sure your staying on track. I like to print mine out and compare each month to test myself and keep myself in check.
How's your budget going? Leave a comment below and let me know!