If you were 100% debt free one year from now, what doors would that open up for you?
But what about if you were only 50% debt free?
That would still be pretty incredible!
Now’s the time to make this year the year that you take control of your money once and for all so that you can say “no” to debt and start saying “yes” to the life of your dreams.
I’m not talking about a resolution.
You know, those declarations where only 8% of people actually achieve success.
I’m talking about a new way of life.
A life where debt is no longer tolerated.
A life where you’re in control of your financial future and money is no longer a stressful subject.
The future is bright.
No matter how much debt you have now, and no matter how much (or how little) money you make, you CAN make progress to get out of debt.
To get started on the right foot so you can successfully tackle your debt, follow these steps:
Take a look back at the past year. If you’ve been keeping a budget or tracking your spending (and even if you haven’t), review how the past 12 months went. This is a good time to do an updated Net Worth Assessment.
How much debt did you pay off? Even if you didn’t pay much more than the minimum payments each month, if you have less debt at the end of the year than you did at the beginning, stand up and cheer! Be proud of yourself for not going deeper into debt!On the other hand, if you have more debt than you started the year off with, make a conscious effort to figure out why your debt balance increased.Were you not paying attention and got deeper into debt without realizing it, or was there a situation (or two) that surprised you that you don’t expect to come up again? Life happens so don’t be too hard on yourself. You really want to look at the year through an objective lens to figure out what lessons can be learned and how to avoid those situations in the future, if at all possible.
Remember, no judging, just adjusting where necessary. [bctt tweet=”No judging, just adjusting where necessary.”]
Did your assets (i.e. retirement account balances, savings account balances, home value, etc.) grow? The idea is that over time, we want our asset values to increase and our debt balances to decrease. This will improve our net worth and our financial health.
How much did you spend on average each month on groceries? Eating out? Utilities? Gas? Clothing? Etc? To figure this out for our household, I created a “Summary” tab in my budget spreadsheet that totals our spending in each category. It then divides the total by 12 so that I can easily see the monthly average we spent for the year. (You can easily do this with a pen, paper, and a calculator, though.) I like to analyze the averages for all categories, but you can start by reviewing the main categories that I listed above and any other pertinent categories for your household.
Determine what went well and areas that need improvement. What were the areas where you consistently went over budget? What areas did you consistently come in under budget? Begin to assess if you’ll need to adjust your budgeted amounts for these categories going forward. For example, as of December 28th, we averaged $601.82 for groceries per month, but we budgeted only $500 each month.Does this mean that we should increase our monthly grocery budget to $600 each month next year? Well, we still feel like keeping our grocery budget under $500 is a reasonable goal.
And here’s why:
I also reviewed the last six months (July through December) and found that on average we spent $464.55 per month! While there were a couple of months where we went over budget, we had four months in the last six months where we came in well under budget!
It might be worth doing some deeper analysis of your spending to determine if you should adjust your budgeted amounts up or down (or keep them the same).
Celebrate your achievements! For some, this will be easy after going through the steps above. Others might have to work a little harder on this one. Even if you are having a tough year financially, come up with at least three things that are going well It could be as simple as lowering your cell phone bill or committing to buying things only when they’re on sale. I’ll bet that if you look hard enough, you can see that you made some positive changes for your financial future.
Use that momentum of feeling accomplished to fuel you to create your plan for the next year.
Determine new budget amounts for gifts, clothes, food, saving, etc. Create your Gifts Budget and determine your Budget Busters.Then break down these amounts into monthly amounts that you can include in your monthly budget. Take a look at your updated Net Worth Assessment and update your Debt Snowball.
Write down your SMART goals for 2016.How much debt do you want to pay off in the next 12 months?You can determine this by deciding how many debts you want to pay off this year (e.g. 3 credit cards), or you can come up with a percentage of debt you want to get rid of (e.g. 50% of my non-mortgage debt), or a nice round number (e.g. $20,000).However you come up with your amount, make sure you write it down (including the amount down to the penny) and add a deadline (e.g. December 31).And don’t forget to include WHY reaching this goal is important to you! Having a strong reason why is vital to success.Or if getting out of debt isn’t your goal, how much money do you want to save in 2016?
Break them down into shorter-term goals, e.g. quarterly, monthly, pay period. Let’s say you want to pay off $20,000 of debt. I don’t know about you, but that sounds like a huge amount to me.But I also think it is completely doable.Split up the amount so you know how much you need to pay off each quarter, month, or pay period to meet your goal.So $20,000 in one year is $5,000 each quarter or $1,666.67 per month.Maybe that amount fits nicely in your budget, and you’ll be off and running knowing you can easily meet your goal.But what if it doesn’t?
When you create your goals, push yourself a little outside your comfort zone. Shoot for a little more than what you think you can actually accomplish.
In 2015, our financial goals totaled $41,469.33!
That breaks down to $3,455.78 per month! And that amount did NOT fit nicely into our budget by any means.
But we knew we had to make great strides in 2015 if we want to be completely debt free (mortgage and everything) by 2021. And we definitely do!
So we pushed forward, got creative, and if you’ve been following my blog for a while, you know that, we were able to surpass those goals!
Even if you can’t see at all how you’re going to achieve your goal, I still want it to make you uncomfortable. Great things happen when we get outside our comfort zones!
And you may just surprise yourself!
Create your January budget.Determine how you’ll be budgeting — pen and paper, an app like Personal Capital, or a spreadsheet. I made it easy for you to get started with my Monthly Budget template. There’s a separate tab for each month, and it will do all of the math for you. Enter your expected income for the month of January.Enter your monthly budgeted amounts.
Use the analysis from your 12 months of spending from Step 1 and the monthly amounts you came up with from your Gifts Budget and Budget Busters exercises from Step 2.
Next, fill in your other expected budgeted amounts, and then determine how much extra you’ll be paying toward your smallest debt on your debt snowball (or how much you’ll be saving each month if that’s your goal).
Set up your daily and/or weekly habits to keep yourself on track. How many times each week will you update your budget? (I like to do it twice a week — usually Mondays and Fridays.)Schedule when you’ll update your budget on your calendar. If you see it as an appointment with yourself, you’ll be more likely to do it. If you don’t have an accountability partner, find one.
Determine what you will do when you get off track — because you will! We’ve been on our debt freedom plan for more than two years now, and we’ve never had a perfect month! But we have paid off more than $120,000 of debt on a single, middle-class income. Our progress has come in waves, and we seem to get off track at least a couple of times each year. But each time it happens, we remember why we’re working so hard to get out of debt, re-commit to our goal, and then resume our focus on keeping our spending low and boosting our income so that we can pay off more debt.I’ll be sharing more next week on how to get back on track when you get off course so stay tuned!
Plan how you’ll celebrate when you reach each shorter-term goal from Step 2. For each of your shorter-term goals come up with a way that you’ll reward yourself when you reach each milestone. Maybe you and your partner will share a bottle of wine and indulge in a fancy dessert. Maybe you’ll sign up for that half-marathon you want to participate in next summer. Maybe you’ll get yourself a long-awaited manicure and pedicure. (Maybe these are all ways I plan to reward myself when we meet our goals. 🙂 Just sayin’.) Shooting for the shorter-term goals may be incentive enough to achieve them, but sometimes we need a little extra push to stay on track.
You can tackle your debts!
It will take work, but with a little-advanced preparation, you’ll increase your chances of achieving your goals.
Now I’d love to hear about you!
What are your financial goals? How are you setting yourself up for success? Please share in the comments below.
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