Establish a Budget and Determine your Income
The first step in taking back control of your finances is to establish a budget. Creating a budget will allow you to determine your real income and how much money you have to spend after all bills are paid. A budget will also reveal where your money is spent, where you can save money, and how you can better spend your money.
First, you need to find out your real income. How much money do you really make per week, month or year? How much of it is taxed, deducted for savings, pensions, child support etc. The number after all deductions is your disposable income that you have to spend on bills and entertainment. Keep this number in mind. It is called your disposable income or real income.
Find Out Your Expenses
Now that you know your real income, it is time to calculate your expenses. Separate crucial expenses from non-crucial expenses. Crucial expenses include food, rent/mortgage payments, utility bills, car insurance, business expenses, health care costs, child support, gas and transportation. You cannot eliminate these expenses, they are crucial for survival! Non-crucial expenses include going out to a restaurant, catching an opera, enjoying drinks at a bar, relaxing at a spa and shopping for clothes you do not really need. Non-crucial expenses are expenses that are not vital for your survival. In other words, you live just fine without them.
Compare your crucial expenses vs non-crucial expenses. Which one is bigger? This will tell you a lot about your spending habits and how you can better spend your money. You should have a clear picture now of where your money is being spent.
Cut Expenses and Work Towards a Long Term Goal
Now that you know your expenses and your real income, you must determine if your expenses are higher or lower than your real income. If your expenses are lower, then congratulations! You are living within your means or in other words within your budget. If your expenses are higher than your real income, you have a problem and are falling deeper into debt.
If your expenses are higher, you must reduce expenses where possible. Cut back on dining out, shopping and other luxuries. Pay your credit card bills on time. Use the money you save to pay off credit cards and loans faster. It will pay off in the end. Stay within your budget. It may be tough at first, but you must be disciplined or you will fall deeper into debt. Have a long term goal or picture in mind. Remember if you want to be debt free, you have to stay within your budget and spent your money wisely. Creating a budget and sticking to it will lead you to financial freedom but you must do your part of the job as well. Stick to your plan and you will have financial freedom in the future.