4 ways to clear financial clutter
Ready to clear your financial clutter? If you've hung out with me here or on social media for long enough, you probably know how a minimalist makeover helped me clear almost 15k of consumer debt. Time for someone else to talk about money! In this guest post, we'll hear from my budget savvy friend Jacob over at Dollar Diligence on 4 steps you can take to clear financial clutter...over to you Jacob....
Is your financial life a mess? Just because your house is clean doesn’t mean your financials are neat and organized. If your house is cluttered, you can stub your toe, and you can definitely hurt yourself by not staying on top of your finances. Though you can’t have a financial yard sale, there are simple steps you can take to clear the financial clutter from your life.
Face Reality First
If your financial affairs are already a mess, you need to start by organizing them. First, you have to understand what your income and spending habits already are. For one month, save every pay stub, receipt, and bill. You can do this electronically or in paper form, up to you, but be consistent by either scanning in paper documents or printing out electronic ones.
At the end of the month, gather everything together and put it all into four piles (or file folders): income (paystubs, reports from side gigs); bills (rent and other necessities); everyday spending (gas, groceries); and debts (credit cards, loans). Then write it all down and add everything up into those categories. This is your financial reality.
Create a Realistic Budget
Now it’s time to use the raw data you collected for the month to create a budget. First, add up all your income and take out taxes so that you have a realistic view of what’s coming in.
Next, rank all your expenses from most to least important. You can’t do much to reduce important bills like rent, which leaves you with the rest. Looking off the numbers you collected last month, round everything up and write down the totals for income and essential bills.
Then start adding sections for the various other expenses in order of importance (groceries and food, health insurance, minimum credit card payments, etc).
When you get to the little things like nights out, stop and add those up in a section that’s “just for fun” money. Take a long, hard look at those expenses and trim some fat, subtracting from your non-essentials and adding that up as “extra,” which now goes in two new categories: savings and debt repayment.
Now this is your ideal financial life, your budget. This is your guide to spending.
How to Stick to Your Budget
So you have a budget, how in the world do you stick to it? There are a few tricks for that. One, have two accounts: one is for the essential bills like rent and power, and the other is for your discretionary spending. This way you won’t accidentally fritter away your rent money on dinners at your favorite restaurant. Of course to do this, you have to stay on top of your finances every day by tracking your expenses. You can use a spreadsheet, home accounting software, or even an app on your phone.
If you have a cosigner on joint accounts, you have to make sure you know what they’re spending too, so always communicate. Make sure to put your minimum debt payments into your essential bills account so you don’t spend that money either. But how do you know how much that is? That’s when your organize your debt.
Organize Your Debt
The easiest way to organize your debt is on a spreadsheet, so gather all of your statements from your loans and credit cards and do some data entry. You need to put in the interest rate, total debt, and monthly minimum payments. Once you have everything recorded, sort your debt by the interest rate, highest to lowest.
This is very important because interest rates mean you’re paying more for that debt over time, so you should start paying down debt with the highest interest rate first. That said, always pay your minimum payments on everything so you don’t incur late fees.
Decide how much extra you can put towards that highest interest rate debt, then add that to the minimum. As you pay on this debt, the principal will go down and so will the minimum monthly payment.
Here’s the secret to paying off debt fast—keep paying your initial payment (high minimum + extra) even as your payments decrease. That way you pay off more and more of your principal every time. Then, when you have that first debt completely paid off, put the same amount towards the next one on your list on top of that minimum. Repeat until you’ve paid them all off.
If your financial life is like a messy home with income and bills scattered everywhere willy-nilly, don’t freak out: there’s hope! Commit yourself to changing, and then follow these tips to organize your financial life. With a de-cluttered budget, you can pay off your debts and feel more secure.
Find Jacob @DollarDiligence on Twitter! Follow him for more articles about personal finance and corny dad jokes. You can also connect with him at Dollar Diligence , Dollar Diligence Facebook page or Dollar Diligence Pinterest