“Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”
Much has changed since Charles Dickens wrote this, but the principle is still the same. Debt is caused by spending more than you receive.
Debt is a symptom of unbalanced books. Address the root cause rather than the symptom. Balance the books and make sure you are not spending more than you are receiving. This is not a moral judgement, just a statement of economic fact.
Most people with debts are in denial. The first step in becoming debt free is to recognise the problem. Address this and you are already well on your way to becoming debt free.
The next step is to find out exactly how much is coming in, how much is going out, and (most importantly) where it is going. Carry a notebook with you and write in it every time you spend any money on anything. Not just the large amounts, but absolutely everything. Every single penny. Put the date, the amount, and what you bought. You will probably get irritated by this at first, and will want to stop. Do not give in to that irritation if you really want to become debt free.
Go through your list and analyse it ruthlessly. You will find lots of things you buy but do not really need. Did you really need that expensive cup of coffee? Was that taxi really necessary? You will be amazed when you realise just how much money has regularly been slipping through your fingers. Highlight everything you now realise you should not have bought.
This exercise alone will probably help you to start reducing your expenditure significantly.
Put everything into a spreadsheet. Record your monthly net income and all your costs, including the amount your notebook has shown you spend as “pocket money”. Go through each cost, item by item, and ask yourself whether it is really needed. If it is, then ask yourself what you can do to reduce it. Some items (council tax for example) are what they are and cannot be changed. But many can. So change them! Keep doing this until you have reduced your expenditure to less than your income.
Make the changes this exercise demands of you and you will have cured the underlying problem. Becoming debt free is now an achievable goal.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.