Sunday, January 9, 2011

Day 87 - Step 4: Get Organized

January 9, 2011

I have developed a guide to help you (and me!) achieve the mindset and principles required to successfully become debt free.  This is the fourth in a series of posts about my Twelve Steps to Debt Freedom.

Step Four: Get Organized
Image: jscreationzs /
The first three steps I discussed are all meant to prepare you mentally to pay off your looming debt balances:
Step 1: Admit You Have a Problem
Step 2: Take Responsibility
Step 3: Get Everyone On The Same Page

Now it's time to finally take some action!  Each section below offers advice on how to become more informed about your income, expenses and debt.  This isn't the time to start making a budget (don't worry, it's coming soon).  But I think this is one of the most important steps to your success.  It is time to sit down and take a look at your financial situation and truly understand what is happening.  Each section provides some general advice about becoming more informed.  For those of you who feel ready to do even more, I also included some advanced tips.  If you feel ready to tackle the advanced stuff, go for it.  If not, don't worry about it.  So let's get organized!!

Income: Do you know how much money you take home each pay period?  By "take home" I mean the actual amount deposited in your checking and savings accounts after taxes, retirement and insurance are taken out by your company.  If you are not sure, don't worry.  You are definitely not alone.  But get ready to become informed and take more control.  Find your pay stub and take note of that amount.  Double check other pay periods to make sure that your pay is consistent.  WRITE IT DOWN!  I don't care whether you use an Excel spreadsheet, a piece of notebook paper or the back of a napkin.  This is a very important number that you should commit to memory.

Advanced Tip: Take a look at the amounts being deducted from your pay to cover health insurance, taxes and 401(k) contributions.  Are the amounts being taken out correct?  Are they reasonable?  Should you decrease (or increase) your 401(k) contribution to help pay off your debt?  Keep these questions in mind as you continue through the 12 Steps.
Debt: Do you know how much total debt you owe?  For a long time, I don't think I wanted to know because looking at the six digit figure made me feel horrible.  If you feel the same way, then you might want to revisit Step 1: Admit You Have A Problem before continuing on with this step.  Ignorant bliss is a coping mechanism for people who don't want to deal with issues in their life.  It's time to suck it up and meet the problem head on.

List out every single person, company or credit card to which you owe money (you can use the same napkin or spreadsheet you started in the income section).  Do not include monthly expenses such as utilities or cable - just long term debts that you are currently paying down.  Next to each debtor write down the current balance you owe, the interest rate, payment due date and minimum payment due.  This exercise forces you to become very aware of the total amount of debt you owe.  People who tend not to track debt balances also tend to underestimate the total amount of debt they carry (see previous comment about ignorant bliss).  Following is a basic example:

As of <DATE> Student Loan1 Car Loan
Principal  45,638  12,476
Interest Rate 5.875% 4.500%
Due Date  12th 7th
Minimum Pmt.  479.00  279.00

Advanced Tip: With the information you have collected you have the ability to estimate how long it will take you to become debt free by scheduling out your payments.  This definitely requires some spreadsheet work on your part so I wouldn't recommend attempting this without some general knowledge about Excel. You should be able to figure out how long it will take you to pay off each loan by scheduling out payments and accounting for the portion of your payment that goes to interest and principal.  You may finally realize that making that minimum payment every month on your credit card means it will take you 8 years to pay it off and end up costing you a ridiculous amount in interest.
Expenses: Now let's take a look at your recurring expenses.  First, decide the time period you want to work with.  I get paid twice a month so I choose to estimate my expenses for each pay period - so on a bi-monthly basis.  Depending on your situation, it may be beneficial to analyze expenses on a weekly or monthly basis.  Next, estimate what recurring expenses you expect to pay during this time period.  This may include utilities, cable, insurance, car payments, daycare, food, rent/mortgage, eating out, entertainment or anything else you expect to owe on a regular basis.  Finally, refine the expenses for each period by figuring out non-recurring expenses.  Haircut, oil change, dentist appointment, birthday present.  It may take a few tries to figure out the best approach for you so don't worry about perfection at this point.  The most important thing is that you have written everything down and have an idea of what your expenses are each period.
Advanced Tip: Sign up for online bill pay and ditch the check writing and stamp buying.  Keep websites, usernames and passwords in a safe and secure place.  I do not recommend signing up for automatic pay.  Automatic pay is when money is automatically deducted from your account each month.  I have heard many nightmare stories about companies billing in error and taking a significant amount of money from checking accounts.  Online bill pay merely allows you to initiate a payment online for an amount and date that you choose.  One thing to keep in mind - sometimes it takes a few days for the payment to process so don't wait until the date your bill is due to make an online payment!
Create Good Habits: Studies show it takes at least 30 days for your actions to turn into habits.  Keep this in mind when you start to feel frustration after a few weeks.  It took me a few months to really understand the flow of money in and out of my bank account.  Here are just a few good habits that have really helped me make progress:
  • Learn how to balance your checkbook - and then do it regularly!!  Everyone should understand not only how to do this but many don't.  Make it a priority to learn AND do.
  • Be aware of the due dates for all of your recurring expenses, but don't wait until the last minute to pay everything.  Procrastination leads to late payments and anxiety while you think about how you should be paying your bills instead of watching that Jersey Shore marathon on MTV.  I pay my bills the same day I get paid so I can get it over with and know exactly how much money I have to deal with for the rest of the pay period.
  • Devote some space in your home solely to your finances and important documents.  Don't pile up your mail on the dining room table (guilty!) only to find out that you threw out an important document along with the junk mail.  Create some sort of filing system for your important papers and devote an area of your home office or living room to anything related to your finances.
Advanced Tip: If you are completely overwhelmed and need some significant help organizing your important papers and life projects, I suggest reading the book Getting Things Done: The Art of Stress-Free Productivity by David Allen.  There are some wonderful tips scattered throughout this book.  Plus the book costs eight bucks - a worthwhile investment in my opinion.  But be prepared to commit to a complete overhaul of your organizing system - this is not a one day project.  If you commit to the process, though, you will be pleasantly surprised by the difference it can make in your life.
 Are you feeling better already?   I hope so.  But if you are starting to feel overwhelmed and developing a horrible pit in your stomach, that is perfectly normal.  Just take it one day at a time.  Maybe today is the day to learn about your income.  Analyzing your debts and expenses can wait until you're ready.  Once you have mastered step 4, understand that you have made tremendous progress.  Be proud - you are on the right track!

Read About Step 5: Educate Yourself

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