Many of us find it difficult to keep track of our daily expenses. Over time, as our financial responsibilities increase, it’s not surprising that many of us find that our debt is spiraling out of control. Credit cards are available to most of us today, and spending on credit cards is no longer seen as borrowing money. Most of us have credit cards as a way of life, earning points and other benefits on the different rewards each card offers.
However, the fundamental concept of credit has not changed. We are still spending money that we don’t have now, hoping that we can pay it back later. But with more and more credit cards, keeping track of our spending becomes a nightmare. At the end of the month, we suddenly realize that we have spent more than we can afford, and the debt begins to pile up.
If you are starting to rack up debt or are in debt, the first thing you should do is stop spending on unnecessary items immediately! But solving your debt problem isn’t just about paying it off. This is one of the most serious misconceptions people have about debt, and people pay off their debt only to fall into another one.
Getting into debt is not a one-time problem. The real problem lies in the lack of a system for personal financial management as well as due diligence. Without solving the root of the problem, you will always fall back into debt and face another round of stress trying to pay it off.
So how should you start cultivating good personal financial management?
1. Resolve existing debt problems
The first thing to do to get back on the right track is, of course, to settle existing debts. Immediately stop buying on credit, especially for anything that is unnecessary. This will prevent more debt from accumulating. Rank through all outstanding debts and see which ones require you to pay first, negotiate to extend some if possible. Prioritize your debts and pay off those that are due first, followed by those with the highest interest rates.
2. Start a personal ledger
Get in the habit of recording all your daily expenses. It may seem troublesome at first, but once it’s become a habit, there’s nothing quite as hard as sitting down and recording your expenses for the day with 15 minutes in the evening. With the right records, you can quickly monitor all of your multi-card spending at a glance, so you can anticipate a potential overspend before it actually does.
3. Pool all your liquid cash in one checking account
Instead of paying your credit card bills from multiple accounts, keep all your cash in one checking account. Use this account for all day-to-day transactions and bill payments. It is the best way to have an overview of all your cash flow and control it.
4. Cut the single largest expense
Categorize your expenses into various groups of tables like food or transportation, etc. This should be easy to do if you’ve been keeping track of your spending. Find the group that makes up the largest amount in your monthly spending. Try to reduce the amount you spend in this group. It’s easier to significantly reduce spending by targeting a large amount. A small fraction of the large amount saved will be much more than trying to scrimp on several small spending amounts.
5. Pay yourself first before you spend
Set a savings goal for yourself and plan how long it should take to reach this amount. Every month when you receive your salary, take out a part to pay this savings plan first. Then, with the remaining amount, spend within your limits. With an amount of savings, you have a cushion to rest on even if there are an unexpected large number of expenses in a month.
When you’ve done all of the above, you should have paid off any existing debts, set up a system to monitor and control your own spending, and slowly started building up some savings. Once you’ve mastered the basics of personal financial management, you should be debt free, at least more so than before. However, being debt free is not enough.
There are many other things to consider in financial management, such as insurance coverage and retirement plans. But first, be disciplined and work to be debt free forever.