Are You in a DEBT CYCLE?
July 27, 2009

“I don’t need any help with my finances, I am getting by just fine.” That may be true. For many, however, the simple act of getting by can very easily fall into a cycle of debt that can lead to bankruptcy, foreclosure and more.

Sherry attended one of our workshop classes with a desire to improve her finances, but also an attitude of defensiveness about her situation. She waited until after the class, to convince our presenter that my presentation didn’t apply to her. Five months later, we saw her again. This time she waited to talk to us for a different reason … she had gotten sick, and had gone through several rounds of antibiotics. The doctor visits and prescriptions that she had to pay meant that other bills had to be neglected. After several months she was still trying to catch up, only now, she was dodging creditors, and in danger of losing her vehicle. She was using credit cards to get by, but now was maxed out and had no options.

What is a debt cycle? It is a pattern in spending and debt that occurs when expenses exceed monthly income. Credit is used to cover the difference. The new payment of additional debt even further exceeds income. The individual continues to borrow money until the entire thing implodes.

Here are the warning signs that you are susceptible to the debt cycle:

  1. You have no Emergency Fund or Savings
  2. You are unclear about your financial situation
  3. You struggle each month to make ends meet

The two largest contributors to the cycle of debt are the lack of an emergency fund, and spending in excess of income. Things do come up. You will have unanticipated expenses (emergencies) that occur like medical co-pays, car repairs, school projects, etc. It is vital to have the money set aside to pay for those things when they happen. Without an emergency fund, you are forced to sacrifice payment on another bill, starting the cycle of debt.

So, what can you do to protect yourself?  First of all, make a budget. If you don’t have one, please use our free budget calculator or worksheet.  Second, make sure that you are spending less than you make. Next, make sure that you have an Emergency Fund in place. To begin with, work hard to get your emergency fund to $500. To find out how much your total emergency fund should be for your household, click here for an online calculator.

Sherry’s situation can be avoided. Take care of yourself first, by saving. When you do have an emergency fund, it feels like less of an issue when you can pay for it and move on with your life.

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Start A Budget
July 7, 2009

At Essential Knowledge, we actually don’t use the word “budget”. We think spending plan is more appropriate. It seems less confining, and more empowering. Whichever term you use, the result is the same. A budget is a plan for your money. And the amount of money you have is not important  whether your bank account has millions of dollars or tens of dollars, having a workable solution for spending is critical.

How do I start? Well, you can’t know where you are going, unless you know where you have been. You can do this one of two ways … you can start tracking your expenses for thirty days; or, you can pull up your most recent bank history online, and do a thirty day review. Use this expense worksheet for free. List every expense in the right category. Total each category to see your total spending. You probably know the exact amount of your car payment and housing, but you will probably be surprised what you spent in other areas.

Does your income exceed your expenses? This seems like a silly question, but it is vital. If it does not exceed your expenses, then you are probably using credit to cover the difference. Your immediate goal should be to cut your expenses in order to cash flow each month.

If your income does exceed your expenses, then decide what you want to accomplish. Do you want to save more money? Do you want to be more disciplined each month? Are you starting a retirement account, or adding to one? Determine what you want to save each month, based on the goal.

Evaluate your spending. You will see some things that you absolutely need, such as food, healthcare, housing and transportation. You will also see things that you just wanted, such as 150 channels of digital cable. The key is to find what you really need, and compare that to what you really want. Obviously, you need to eat, and have a roof over your head. But, could you live somewhere less expensive, or take your lunch to work?

Start with the easy things. Accomplishing small steps is satisfying and will motivate you to do more.

Each month, look for ways to save money in your budget. You will be amazed what you can do, regardless of your monthly income. Check back with me, too, for other ways to save.