Planning For Wealth

Before you can start making specific goals and plans for getting out of debt you need to know where your money is going and how much you’re in debt.  To do this you need to gather several pieces of important information.  Gather your latest pay stubs, banks statements, credit card statements, and other bills.  Also gather together all those recipts you’ve been keeping since you started tracking your spending.  From these bills and statements you will get a good idea where our money is going and how much you are in debt.

First, you need to know where your money is going.  The image to right is a spending plan I made up to determine where my monthly income goes.  I set this form up using Excel so I didn’t need to worry about doing the math myself.  Using this form as a base it’s easy to see how much you spend on housing, groceries, credit card bills, or auto fuel.

Start by determining what your income is.  Write all your sources of income and add them up.  Use the monthly average of any income sources that change from month to month or are received only every 2 or 3 months.  Then using your bills and statements divide your monthly expenditures into various categories.  Its a good idea to break each category into several sub-categories to help you better determine where your money is going.  Now write down the total amount for each sub-category.  For items like auto insurance that you pay every 6 months, use the total payment amount divided by the number of month covered.  Add up the total for each category, then add up all the categories to get your total expenses.  The last step is to subtract your total expenses from your total income.  This will give you an idea of how much extra cash  or short fall you have at the end of the month.

If you have extra cash at the end of the month you’ve got a good start at finding cash to pay down you debt.  If your expenses are greater than your income then some extra work will be needed to reduce your expenses. 

Now that you have a better idea where your money is going every month you need to find out just how much you’re in debt.  For every credit card you make payments on, every loan, charge account, or personal debt write down who you owe, when the payment is due each month, the minimum payment amount, and the total remaining balance making a separate column for each item.  Add up all the values in the minimum payment column.  This lets you know what the minimum amount is you need to payout each month to stay current on your debt.  Then add up all the values in the total remaining balance column.  This amount is your current total debt.  The due date column is there as a  reminder of when each payment is due.  At this point it does not matter what order your debts are listed in since we’re just wanting to determine your total debt.  I’ll discuss different ways to order your debts when paying them off in an upcoming article.

You’re at a good point for determining how to get ride of your debt now that you know where your money going each month, your minimum monthly debt payments, and your total debt.

To reduce debt we need to know where our money is going.  We know this by tracking our spending.  Tracking our spending helps us in several important ways:

• Know where our money is going - This one seems obvious but is often over looked.  Most of us think we now exactly where our money goes every month.  Then we are surprised when there is still 1/3 of the month to go when we run out of money. 
• Identify cash leaks - Cash leaks are things we do or buy that take money out of our pocket without giving any tangible return.  Cash leaks can be small or large.  These leaks could be getting a coffee from Starbucks everyone morning, eating lunch out every day, or replacing your car every 2 - 3 years.
• Setting Goals - Once we have an idea where our money is going we are able to develop goals for making better use of our money.  We set short term goals for eliminating cash leaks.  Then set short, medium, and long term goals what we want to accomplish with our money.
• Basis for spending plan - By tracking our expenditures we are able to determine how much we spend in different categories such as auto fuel, groceries, housing, etc… These various categories can be used to as the basis of a spending plan or budget.
• Saving money - After we start tracking our spending it s usually easy to identify one or more areas where we can save money by cutting or eliminating spending in some area. 
• Identify areas of under spending - This one may seem out of place but it is important.  If you are not setting money aside for an emergency fund you could be setting yourself up for trouble.  The main area for underspending is insurance.  Most of us have either no or too little insurance.  This includes all categories of insurance; life, health, property,aand auto just to name a few.

To track your spending start by keeping all receipts no matter how you paid.  Ask for a receipt if you did not receive one.  Don’t rely on checks you’ve written as a receipt.  It could be a month or more before you get that check back from the bank.  And we want to know the details of the check now.

At the beginning of each month set up a worksheet or your favorite spreadsheet for recording your receipts.  Make a column for who you paid and the total amount paid.  Then make a column for every category of spending you think you will need.  Leave room for additional categories in case you’ve forgotten some.  It doesn’t matter whether you use an electronic or manual method.  And it doesn’t matter what categories you use as long as they are meaningful to you and that they are used consistently.  Now, at the end of each day go through each receipt for the day entering who you paid, the total amount you paid, and enter the amount paid under the appropriate category.  If the amount falls under more than one category then split the total between the appropraite categories.  At the end of the month total each category to see what you spent during the month.  You may be surprised at how much you actually spend on some things.

Keep a record of each month’s expenditures.  Record the total of each month’s expenditures on a separate worksheet.  This second worksheet is so you can easily compare each month’s totals.

Start right now.  The earlier you start tracking your spending the better equipped you will be when you start setting your goals and developing a spending plan.

Several months ago my wife and I decided it was time to defrost the freezer in our garage.  So we moved its contents to our smaller kitchen freezer.  We had been slowly using up the contents of the freezer to do just this.  We unplugged the freezer, opened the door, then promptly forgot about it.  About 2 weeks later I decided to buy a small coffee maker for heating water for my tea.  I drink several cups a day and was heating the water, one cup at a time, in our microwave.  About a week later we got our PG&E bill.  We noticed that the bill was little lower than normal but didn’t think anything of it.  Around that time we remember our freezer but decided to leave it alone; we were doing fine with our packed smaller freezer.  Another month went by and we got the next PG&E bill.  We were in shock.  The bill was about $80.00 less than normal.  We let another month go by and again our utility bill was $80.00 less than normal.  We knew then that the cost savings was from turning off the freezer and using the coffee maker to heat my water.  We eventually determined that the freezer was costing us $60-$70 per month to operate. We wanted our freezer room back and we hated the refrigerator in our kitchen — it came with the house when we bought it and the door shelves kept falling off — so we decided to use the old refrigerator for extra cold storage in the garage and get a new refrigerator for our kitchen.  In the end we bought a new refrigerator that only cost us about $4.00 a month  run.  Just by replacing the old freezer we saved $66.00 a month in electricity.  Switching to the coffee maker saved us an addition $10.00 a month.

Several years ago we also found out that the newer front load washers and dryers can cut your water and electricity bills by a larger amount over older model washers and dryers.  Our 13 year old washing machine decided to die one day.  The gears on it were worn out.  So we went looking for a new washing machine.  After trying several different stores and looking at many different models and comparing energy ratings we settled on a Neptune front load washing machine from Maytag.  After some debate we decided to go ahead and get the matching dryer with it.  Our dryer still worked but it was near the end of its life.  Together they cost use about $1700.00.  That was a lot but we figured we’d recoup the cost difference in a year or so with the reduced utility bill.  We’ve had this washer and dryer now for about 5 years.  Our water bill dropped about 40% and our PG&E dropped about 50%.  All together, switching to the new front load washer and dryer saved us about $100.00 per month in water and electricity.  We not only recouped the extra cost but they paid for themselves in just 17 months.