Debt free management begins with a series of steps designed to keep a family out of debt and keep them there. We’re coming to the end of the free and easy consumer culture and making some hard choices about how much we’ll spend as a society. Much of this has been forced on us by the drying up of the credit markets. But, there’s also a sense among families that they want to engage in debt free management.
The first step in debt free management is to make a listing of your assets and liabilities. Hopefully, you won’t be surprised by what you learn when you make this list, but many families are shocked to learn just how little net worth they have.
Next, you need to make a budget. The budget should cover the essentials, including debt payments. It should have a certain amount set aside each month for a rainy day. Only with anything left over should you use to buy non-essentials.
The key to debt free management is to realize just how little falls into the category of “essentials.” If you have a home and don’t want to move, your housing payment is an essential. Many homeowners are not in a position to move because they owe more than the home is worth.
There are other things that fall into the category of “essentials,” but there is some flexibility in the budget. For instance, calculate how much you are spending on food including groceries and meals out. Most families can cut this amount in half by foregoing restaurant meals and pre-packaged foods at the grocery store. You will probably find that you actually eat healthier meals on a slimmer budget.
Other things to look for in this category include the amount you are spending on utilities, cable, and cell phones. While you need some level of each of these, you may find that there is a lot of waste. Tell your kids that they have to stop texting and cut the plans so that you use cell phones for only the basic necessities of life.
Make sure that you include debt service payments in your essential payments, as the whole goal is to get out of debt. In fact, this is one area where you should splurge. Try to pay double on any revolving credit payment and at least $100 a month extra towards your home mortgage. When you get a bonus at work, a tax return, or a gift of money, consider putting half toward the debts you have.
The next step in debt free management is to put something away for a rainy day. Too many people get into trouble with debt when something goes wrong. Even with health insurance, an unexpected medical emergency can cost you thousands of dollars. An expensive but necessary car repair can send you back into credit card debt if you don’t have a savings cushion.
Finally, if you have anything left, you can use it on the non-essentials. Recognize that when you adopt a debt free management budget that there probably won’t be much to go to this category at first. You will see a diminished lifestyle at first. There won’t be any trips for a while. You’ll have to live with last year’s clothing styles and any new clothes will be bargain basement or thrift store. Eventually, though, you will actually have more money for extras as you won’t be paying on high interest rate debt.
If you are considering a debt free management budget, recognize that there will be sacrifices at first that pay off over the long run.