The first and most essential step in reducing debt and reaching your financial goals is to create a budget and stick to it. Start by listing out all your sources of income including your salary, benefits, dividends and all other consistent sources of income, make sure to note how much and how frequently you receive these funds. After listing your income it’s time to list your expenses, this includes everything from rent/mortgage and transportation down to small day-to-day purchases; it’s important to be as accurate as possible, so take your time.
Once you have income and expenses listed, subtract your expenses from your income to determine how much is left over for savings and paying off debts. While it isn’t necessary, many people find it easiest to track day-to-day expenses and stick to their budget with the help of free applications available for mobile phones and computers.
Avoiding non-essential expenses is key to sticking to your budget and staying debt free. After you’ve created a budget, see which expenses you can reduce or eliminate, such as cutting back on entertainment, shopping and dining out. This can also include downsizing, such as moving to more affordable living accommodations or utilizing public transportation instead of driving. By reducing your expenses you’ll have more money left over to put towards savings and reducing debts.
A key step in reaching your financial goals is paying off your debts. Generally speaking, the longer you have debts, the more interest payments will accumulate leading to more financial difficulty. One of the most common debts among consumers is credit card debt; while credit cards can be a quick and convenient form of payment, interest can quickly accumulate and become unmanageable, so it is recommended to use cash or debit cards when possible, to avoid accumulating interest and debt.
There are a couple of common methods for managing and reducing debt, and it’s important to find one that works for you. One method people use to manage debt is to start by paying off and eliminating the smallest debts first and working up to larger debts, this can simplify the process and help maintain motivation as you complete each successive debt. Another method is to work from the top down, eliminating the largest debt with the highest interest first, then working your way down to smaller and smaller debts until you’re complete. There is no one method that is right for everyone and if you’re not sure which strategy to use in paying off your debt, professional financial managers can be a helpful resource to find the right solution for your situation.
While it isn’t a requirement, it can sometimes be helpful to get a professional opinion to plan and achieve your financial goals. Professional financial advisors generally work one-on-one with clients to create a plan to managing your finances, suggest tools or other resources such as investments, insurance, and expense trackers to help accomplish those goals, and provide insight into avoiding future debt. While there are professional financial advisors you can hire, many banks, schools and towns offer free financial advisor support, so look around for one that fits your budget.
As you reduce your expenses and pay off your debt it is important to create a savings fund in case of emergency expenses. Whether you encounter unexpected medical expenses, a loss of a job or even unplanned car repairs, it’s important to have emergency funds that can help get you through and avoid taking on additional debt. When you create your budget, we recommend allocating a portion of your income to this savings account, this way it will be easier to grow your savings over time and avoid unnecessary spending.
To determine how much savings you will need refer again to your budget, it’s good to have a savings account with enough money to cover your expenses for at least three to six months, giving you time to get back on track should anything ever happen.
Reducing debt and reaching your financial goals can be intimidating and won’t happen overnight so it’s important to stay motivated, track your progress and give yourself credit in meeting milestones on your journey. By setting a budget and tracking your progress it will be easier to stay motivated as you achieve steps along the way. Remember, everyone’s financial journey is different so it may take longer than you expect but with realistic goals, hard work, and in some cases, professional help, you can achieve them.