In a challenging economy we are faced with some tough financial decisions. In order to make informed decisions, you need to take stock of all aspects of your financial picture, prioritize your expenses, and adjust accordingly.
Prioritizing your debt can be a key component in this process, as it will give you an opportunity to really examine your spending habits and figure out what’s truly important.
Figuring out which bills need to be paid first and why, and which obligations can be eliminated or postponed, will help you create a plan for surviving tough financial times. You may even come out on the other side of this recession in better shape than before!
Finding out where your money goes is the first step in this process. For one week record every expense your family makes- from paying the mortgage to that Starbucks coffee on you way to work. Keep receipts when you can. Log the rest in a notebook or your Blackberry. At this point make no judgments regarding spending habits. Just record expenses.
Next, write down all bills and obligations, their due dates, payment amount and all contact information for that creditor. You will use both sets of information to prioritize your expenses.
Examine the Data
Lay out what you’ve gathered at the end of the week on the dining room table. Place each receipt or expense in one of 3 piles labeled:
- Perhaps Unnecessary
Your “Necessary/Non-Negotiable” pile will include bills like your mortgage or rent, insurances, heating, electricity, childcare and any vital non-covered medical expenses. Depending on your situation, your car payment will probably go in the “Necessary” category.
Clothing, food, and perhaps electricity will probably go in the “Adjustable” pile. Everyone’s expenses will vary according to their own needs and circumstances, but you get the idea.
After you have looked at the raw data, you’re ready to prioritize your expenses.
Make Some Thoughtful Decisions
With the data (your piles) in front of you, you’re ready to make some thoughtful decisions. Create a master list by charting each item in your piles, on your computer or in hard copy, using your three categories. You will prioritize using this list. Print it off and get out a red pen and a black pen. As you look at your list, ask yourself:
- Can this expense be adjusted somehow?
- Can this expense be eliminated altogether?
- Could this bill be negotiated for better terms until times get better?
Any expense that can be eliminated altogether- cross off with a black pen, for example: the Starbucks coffee.Any expense that can be adjusted, food and lunches for example- circle with red. Any bill that might possibly be negotiated for better terms- put a red star next to it, perhaps deferring a school loan or refinancing or restructuring your mortgage.
Thoughtfully go down the list, totaling expenses in each column. You will come up with expenses that you must, need, or decide to continue each month, and savings you’ll create by adjusting and eliminating certain expenses. What’s next?
You now have a clear picture of where your money must go and when. You have identified areas that need to be adjusted. You have decided to sacrifice certain habitual expenses that drain your budget needlessly.
Until the economy straightens out, use what you’ve learned to guide your purchasing decisions. Postpone buying the new washing machine if the old one can be fixed for less. Shop where real discounts exist, try buying in bulk and using coupons, check out local consignment shops for clothing needs.
Additionally you can:
- Ask for a deferment on your student loans
- See about refinancing your car or home for a lower interest rate (for those with perfect credit only, unfortunately)
- Pack healthful lunches 4 days of the week
- Consolidate credit cards to a single lower interest card
- Contact any creditors and ask if due dates can be adjusted to make it more possible to pay on time
Use Your New Plan to Guide Future Decisions
Perhaps prioritizing expenses has forced you to look at some hard facts. Housing expenses, including taxes and insurance, should not exceed 30-35% of your gross income. Would moving to a less expensive home, selling, or renting make more sense? When purchasing your next car, wouldn’t it be nice to have a lower payment instead of a fancier model? When planning the family vacation, consider day-trips with a historic or art focus, rather than an extended long-distance trip.Get the idea?
Even when hard times are looking like they’re fading away, use what you’ve learned to guide your buying decisions. Debt is a necessary evil in our society, but its hold can be lessened if you make wiser decisions and create new spending habits.
You might want to read some of the other articles in the “Saving Money” section of this site. Helpful sites on the Web include SCORE, Counselors/Mentors to Small Businessmen at Score, Consumer Credit Counseling Services, and Money Management International.