Getting out of debt has simplified our finances greatly. We continue to seek out new ideas to simplify our money management system. With that in mind, I've been thinking about my RowdyReaders. Over the last few weeks, I've received a number of emails asking how we got out of debt so quickly. Below are a few tips that have helped us reduce stress and manage our money more effectively. The following tips are based on what we have learned from Your Money or Your Life and our own trial and error experiences.
1. Create a basic budget.
Setting up a basic budget will help you estimate your expenses. This is super helpful information, especially if you want to start cutting your costs to lead a minimalist lifestyle or exit the cubicle forest. In some ways, I think budgeting is like dieting. It doesn't always work. However, I think it's important to outline your monthly expenses. They might fluctuate, but at least you'll have a general sense of your financial obligations.
Micro-action: Set-up a basic budget. You don't need any fancy programs to create a budget; a pen and paper will work perfectly.
2. Use simple tools to track your expenses.
Tracking expenses is a good exercise because it forces you to take a hard look at what you’re spending your money on. In the past we used a program called MoneyDance to automatically track our finances. It's not a bad tool, but the program made my life a lot more complicated than it needed to be. The tool didn't help us focus on what we were spending our money on. In essence, we weren't paying attention. Now we're using a basic spreadsheet to track our income and expenses. I feel more in touch with our finances as a result.
Micro-action: Evaluate how you track your expenses. Can you simplify the process? Do you use a fancy computer tracking tool or can you use something more basic, like a pen and paper?
3. Pay in Cash
In Your Money or Your Life the authors define money as life energy. We exchange precious, non-renewable life energy for money. Once we know what money really means to us, we're more likely to be mindful of our spending.
If you use cash you're less likely to overspend. It's a whole lot easier to swipe a credit card and disassociate from a particular purchase. Giving up cash is like giving up a treasure. You can actually feel your balance being reduced.
Micro-action: Start using the envelope system. For example, envelopes can be separated by spending category in your budget for things like groceries, dining, laundry, etc.
4. Lots of accounts and automation can lead to errors.
In Unautomate Your Finances Baker talks about how automation can be a good thing. For example, I love having my cell phone bill automatically deducted from my checking account every month. However, Baker also emphasizes that too much automation can lead to unnecessary stress and errors. Having a minimal number of checking, savings and credit card accounts open is much easier to manage.
Micro-actions: Are there any open accounts that you can close? Make a list of all your open accounts and figure out how you can simplify. For instance, we just merged a number of savings accounts into one. We had a tax savings account, tiny house savings, flexible savings, and a small business savings account!
5. Use Credit Cards Sparingly
Using a minimal number of credit cards (or not at all) is key to spending less. For instance, we only have one credit card and use it for car rentals only. In my experience, I'm more likely to go out to eat and buy unnecessary stuff on credit. Using cash has made me more mindful of my purchases.
Micro-actions: Consider the option of going credit card free. If that's too scary, put your credit cards in a safe place. If they are hidden in a drawer, you'll be less likely to overspend.
Also, be sure to order a free credit report to see what accounts you have open and what accounts should be closed.
6. Check your online balance.
Before you make any big withdrawals or transfers, check your online bank balance. This seems like simple advice, but mistakes happen. For instance, I made a slight accounting error a few weeks ago and ended up with an overdrawn checking account. I haven't done something so lame since high school and it was all because I hadn't reconciled my account balance. Fees on an overdrawn account add up quickly. And that's money you could be saving.
Micro-action: Be aware of the balance in your checking and savings accounts. Log-in frequently to make sure your purchases have cleared and that they match your own records.
7. Stop buying stuff, sell your car(s) and pay off your debt.
I've received a number of emails from folks asking how we got out of debt so quickly. The short answer is: we stopped by unnecessary stuff, sold our cars, and focused on paying down our debt rather than investing money in the stock market.
You can do this too. Getting out of debt won't happen overnight, but it is possible. It took us two years to pay off $30,000. It was hard, but I'm thankful that burden is gone.
In addition, we continually look for ways to improve our money management system. That includes reading a lot of books, blogs and listening to what has worked for other people.
Micro-actions: I highly recommend simplifying your finances as much as possible. If you're not sure where to start, read Your Money or Your Life.
*Disclaimer - I am not a financial expert or an accountant. And it's important to remember everyone's situation is different. Before you make any big financial decisions, consult a financial professional.