@marco124 I won't do the math for you, but please take the time to read my entire comment --- twice. It is long and it is complicated, but I have been told by more than a few people that it has helped them make sense of their situation and to get out of debt.
You
must track your spending. All of it. Unless you have been tracking expenses in at least as much detail as indicated below, you spend much more than you think you do.
What do you spend each month for these categories and any others that you can think of? You can guess at the beginning, but eventually you should track expenses for several months, especially for the variable categories like food or gasoline/petrol.
- rent or mortgage
- utilities
- food -- in two parts: groceries for home, food out (restaurants, coffee shops)
- tips at restaurants
- child care -- maybe separately for babysitting
- household items (Scotch tape, thumbtacks, etc)
- laundry expenses (whether at home, or at laundromat)
- eyeglasses (if you wear them check zennioptical.com for inexpensive glasses; I am not affiliated with Zenni)
- Internet
- Netflix and similar entertainment subscriptions
- cable
- phone (landline, cell)
- vehicle fuel for the month
- vehicle repair
- vehicle maintenance
- parking
- car insurance
- driver license
- vehicle registration
- renter insurance
- life insurance
- health insurance
- gym membership
- pet expenses
- personal care (hair, etc)
- clothing replacement
- laundry and/or dry cleaning
- incidental purchases (the coffee at the convenience store)
- etc
- etc
- emergency fund -- to which you must contribute each pay period until you reach the goal you set.
Some of these are annual expenses (car maintenance, driver license). Break them down to monthly. Every month put the money aside -- and track it.
People tell you to go to various subscription websites for this, YNAB for example. If you're already deep in debt, why would you want to spend more money? Start with a spreadsheet or even paper and pencil and a calculator. But TRACK THE EXPENSES,
every . one . of . them. Every day. This takes ten minutes at most. You can afford that time.
Now that you know how much you spend, and on what, decide what you can reduce or eliminate. (This is dificult. This is also necessary.)
This is your budget. Over time, as you get accustomed to living on a budget, you might adjust these numbers; for now, your decisions should give you a budgeted amount per category and a total amount of expenses. Both of these numbers are important.
Base your budget on what you need to spend, not on the idea of spending all your income --- or more. After all, that's what got you in this mess, isn't it?
At the same time think about income and debt.
For income, you want to know your
average monthly take-home pay. If you're paid once a month, that's easy to know. But suppose you're paid weekly. Then multiply your weekly take-home pay by 52 and divide by 12.
For example, take-home income of $400 a week x 52 weeks = $20,800 divided by 12 = $1,733 a month.
The other way is to multiply weekly pay by 4.33, the average number of weeks in a month. In this example, $400 x 4.33 = $1,732 a month. Close enough.
I am going to use this amount for the rest of my comment. The amounts are just numbers; substitute your own numbers.
(If you earn salary plus commission, make a budget that based on the salary alone. Use the commission to reduce the debt. Also, if your company pays bonuses, don't count on them in your budget. When you get them, use them to lower your debt rather than splurging on a vacation you can't afford.)
Next, look at debt.
List all debts separately, with the amount owing, the monthly payment, and the interest rate. You need the APR to better decide which debt to eliminate first. For example
Debt
Amount
APR
Payment
CC 1
15,000
14.7
336
Car
9,245
15.6
157
CC 2
4,050
21.6
150
You can sort these in whatever order you think best; lowest balance to highest makes more sense to me. If you do this in a spreadsheet, you can sort in various ways, play with various calculations, etc.
Now you know your expenses, you know your monthly debt payments, you know your income. You now do the math to see how much is available for other things, the spread between expenses and income.
Let's assume that your necessary living expenses add up to $1,000, and the debt to $325.
Code:
1733.00
-1325.00
________
408.00
Call it $400 for convenience.
Because your objective is to reduce the debt to zero -- why would you have any
other objective? -- let's add $200 a month to the debt that has either the lowest balance (snowball method) or the highest interest (avalanche method) -- whichever seems better suited to your situation and your psychology. However, I am going to suggests a slight twist on either method.
While you do this, you should do two more things about the debt.
First -- here's the twist -- don't reduce the payments on the other debts from where they are this month.
If
* you can afford to pay $xxx this month,
*
and you've measured your expenses accurately,
*
and you're sticking to your budget,
then you can afford $xxx next month and the month after that, etc.
If these are diminishing-minimum-payment debts, like credit cards, paying more than the current amount will reduce the interest you pay each month, because the extra payment will reduce the balance. Saying that differently, keeping a level payment will reduce the debt faster because the interest is calculated on the outstanding balance.
If you can't afford to continue to pay the current minimum, try to pay a little more than the minimum next month, and then continue to pay that amount thereafter. This provides a psychological advantage, because when the first debt is paid off, the second is
already lower than it would have been if you had been paying only the minimum each month.
For car loans, that may not be possible, but paying extra can shorten the loan period and cost you less interest. Call the lender to find out how to have the extra amount applied to the principal, not toward next month's payment. You might not be able to do this with automatic payments. If that's the case, continue the auto-pay (you did set up auto-pay, didn't you?), but send in the extra money by check, with instructions. Ask the lender how to do this.
(If you want to pay your mortgage at a faster rate there is usually a clearly-shown way to pay additional toward the principal. If there's not, ask the lender how to do this.)
Second,
stop adding to your debt
* Put the credit cards away.
* Don't take out more loans.
* Go on a strictly cash basis.
* Don't buy what you can't pay for from the spread.
Yes, there are emergencies and things that cost more than one month's spread. Yes, they must be dealt with. But this is general advice.
The other $200 from the spread could be partly play money, partly long-term saving, partly building up an emergency fund. If your debt is large, you should keep the play amount low until you have an emergency fund.
Here is a non-emergency example of unexpected expense. By non-emergency, I mean a situation where you don't have to give someone money
this minute.
You have set your budget as described, with $200 for savings and fun. But your washing machine breaks. You REALLY don't want to buy a used machine, and a new one will cost $500. But buying a new one tomorrow will require using the credit card. Don't use the credit card. Use a laundromat until you can pay for the washing machine in cash. Stop any fun spending, maybe reduce the long-term saving contribution. Squeeze the budget a bi. Remember that you could dry most of the laundry at home on a clothesline. You can also take your own detergent to the laundromat so you don't have to buy their expensive stuff.
Here is a semi-emergency example. You get a flat tire, and the tire is not repairable. A new tire of the brand you prefer costs $100, and you have only $50 in your emergency fund. This ONE TIME I would allow you to add to the credit card debt -- but only if you promise to add another $50 to your payment next month. But first, try to find a used tire, or a cheaper new tire. This isn't the time to worry about whether your car is totally pimped out.
If there isn't a surplus, you have several options:
- sell off unneeded stuff -- short term. This also has the advantage of de-cluttering your living space, which also the work to keep it clean, and reduces your stress
- Increase your income --- second job -- longish term. May also hep you learn new skills & explore new job choices.
- Decrease expenses -- long term (reduce Internet cost, eliminate restaurant meals, limit vacations or vacation spending, reduce grocery cost by changing eating habits -- this doesn't mean "starve"). this is not as difficult as you might imagine, as you'll find out after you critically and honestly analyze your spending.
The general term for this is "living below one's means." As you get out of debt, build your emergency fund, and operate on a firm financial basis, monitor your expenses, keep control of your spending, and enjoy a life with less worry and stress --- you will be able to increase your discretionary spending, add a little more luxury or fun items to the budget, and enjoy a life with less worry and stress.
