Pay Off Debt by Finding Out Where Your Money Goes

To do this you have to figure out, A.) how much you make (that is, how much is coming in), and B.) how much you spend and where.

If you get a regular paycheck, the first part of the question is easy -- less easy if you're self-employed, but still possible.

The second part of the question will require some research on your part, unless you already keep meticulous spending records -- and the chances are you don't, if you're in debt. ("I bank in the fog bank," said a woman I interviewed for my book Maxing Out).

Where's the Money Going?

Step One: Keep a spending record.

Record every last little cash outlay as well as big expenditures. You're trying to find out where your money is going the way a dieter finds out how many calories she's actually consuming.

  1. Figure out how much money you have coming in
  2. Track your expenses
  3. Create a realistic spending plan
  4. Figure out how much you can pay towards debt
  5. Repay your creditors proportionally
  6. Keep the faith

At the end of each week, break down the spending into categories such as groceries, clothes, dry cleaning, gas, coffee, newspapers and magazines, and fill in the figures.

The more categories you have, the better. For example, don't just put down "food." Break it out into groceries, fast food and restaurants. Categorizing specifically will tell you more.

After just one week of this you'll probably have a few surprises. After a month you'll definitely have new information -- such as how much you spend on late video returns, two daily cappuccinos, or just how much those little forays at the drugstore for "an eyebrow pencil" are costing you. (Many women are horrified when they see how much they're spending on cosmetics and hair-care products -- especially when so much of that stuff ends up in a drawer, unused.)

Step Two: Make a Plan

Now, after you've got a few months' worth of nice, accurate spending records, the fun part: juggling. Did you think I was going to say "Cut out this and cut out that"? No. You're going to create a Spending Plan that is based upon what you really need, what you really earn, plus a segment for debt repayment.

Most people, when they try to deal with big chunks of debt, try to figure it out backwards: "I'll pay $400 a month" they say, heaving a big sigh. But if they gave $400 a month to their creditors they wouldn't have enough to live on, so the "plan," being entirely unrealistic, is whacked from the get-go.

You are going to create a plan that's the height of rationality. It will be based on real figures. And you'll see, after you've allotted money for all your expenses, including such categories as clothing, entertainment, and health (which might include payments for your yoga class), that in fact you only have, say, $125 a month left for debt repayment.

That's what you have, and that's all you can work with. And here's the good part. No one can demand that you work with more.

Who Gets Paid First?

Now, how do you divvy up that $125 a month? You've got several credit cards, some doctors' bills, money you owe a friend from a vacation you couldn't afford. (Vacation is a legitimate category in your spending plan; put some money into it every month.) You do not pay the most to the guy who's maddest at you. That's neither rational nor fair to your other creditors. One fair and rational way to repay is this:

  • Determine how much you can afford to pay, in total, toward your debts each month. For our purposes, we're using the figure $125 (remember, the figure is irrelevant, it's the process that counts -- you're paying back your debts).
  • List all your creditors and the amount you owe each one.
  • Add up the debt.
  • With a calculator, figure out each creditor's share, or percentage, of the total. The formula is CA divided by TD equals CP. (Creditor's Amount divided by Total Debt equals Creditor's Percentage.)
  • Each monthly payment to each creditor will be figured on the basis of the percentages you worked out with the formula, For example: Visa's debt is 60 percent of your total debt. Visa will get 60 percent of $125 a month, or $75 a month. The total you owe your brother is 5 percent of your total debt. You'll pay him $6.25 a month.

A final, uplifting note: It may seem that it will take you forever to pay off your total debt. But although your payments will probably start small, they'll increase with time.

As Jerry Mundis writes, "The process builds on itself; in the end, repayment is often rapid and dramatic." (See his book, How to Get Out of Debt, Stay Out of Debt & Live Prosperously. It'll be a gift to yourself that will pay you back tenfold.)

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