The Plan

We have the rules and the basics, now what?  Now comes the hard part, understanding what can change.    You have to take an objective look at your finances and determine the difference between a want and a need.  For me the want is "I want Starbucks every morning"-the need is "I need to eat a healthy breakfast and have a bit of caffeine every morning".    More times than not the "I want Starbucks" wins out.  I believe this happens as there is bit of psychology going on here.  I think  " I work very hard for a living, I deserve at least a $4 cup of coffee each day".  Whether this is true or not, this can set us up for failure as this mindset can carryover to other parts of our lives.  I'll write more on this in a later blog.

I have used a very simplistic budget and credit card example, to try to illustrate the process.  I know this is not a very good representation of  reality, but I am hopeful it will at least give an idea of the process.  A monthly income/expenditure list might look like this:

 

	Week 1	Week 2	Week 3	Week 4	Monthly Total
Weekly Salary	500	500	500	500	2,000
Rent	(300)				(300)
Gas	(50)	(50)	(50)	(50)	(200)
Food-groceries	(100)	(100)	(100)	(100)	(400)
Food-eating out	(50)	(50)	(50)	(50)	(200)
Phone		(100)			(100)
Clothes	(30)	(30)	(30)	(30)	(120)
Electric			(100)		(100)
Water			(40)
Car payment				(300)	(300)
Car Insurance		(100)			(100)
Credit card		(75)	(100)		(175)
Parking	(30)	(30)	(30)	(30)	(120)
Balance	(60)	(35)	0	(60)	(155)

A little depressing-you work hard and have no money.  In fact it's worse than no money-you have to borrow to pay your living expenses. These shortages are being covered either by credit cards or overdrafts from the bank.  With overdraft fees of $35 per item returned and credit card interest up to 30%; it is an expensive way to finance life.  Assuming that these overages are going on a credit card, you credit card balances may look something like this:

 

Beginning Credit Card Balance	1,100	750
Payments	(75)	(100)
Charges	75	80
Interest for 30 days @ 22%	20	13
Ending Balance	1,120	743

You can quickly see why your credit card balances are not going down, even with paying more than the minimum each month.  The interest and new charges are not allowing the balances to go down.  If you pay late or go over the credit limit, the fees can be up to $35 each;  adding even more to the ever growing balances.

The first plan is how to reduce expenses so that you no longer have to use the credit cards, pay the credit cards off,  and start putting a bit aside so you don't have to depend on credit cards for unexpected expenses.

Looking at the above example, I would look to add $25 to the weekly grocery bill and stop eating out; cut out clothing expense, and budget  large expenses throughout the month.  By budgeting large expenses throughout the month, you won't have one week where one large expense has wiped out your cash  leave you vulnerable to using your credit card to cover the shortage.  The new budget would look like this-I've highlighted some of the changes:

	Week 1	Week 2	Week 3	Week 4	Monthly Total
Weekly Salary	500	500	500	500	2,000
Rent	(150)		(75)	(75)	(300)
Gas	(50)	(50)	(50)	(50)	(200)
Food-groceries	(125)	(125)	(125)	(125)	(500)
Food-eating out					0
Phone		(100)			(100)
Clothes					0
Electric			(100)		(100)
Water			(40)
Car payment	(60)	(75)	(30)	(135)	(300)
Car Insurance	(50)	(50)			(100)
Credit card	(35)	(40)	(50)	(50)	(175)
Parking	(30)	(30)	(30)	(30)	(120)
Balance	0	30	0	35	65

Based on the new budget, you would have $65 extra each month.  I would advise to take a portion of the amount (maybe $35) and start putting it aside for unexpected expenses that always seem to come up.  I would then take the balance of the extra ($30) and start throwing it toward the credit card with the lowest balance.  The revised credit card balances would start to look like this:

Beginning Credit Card Balance	1,100	750
Payments	(75)	(130)
Charges
Interest for 30 days @ 22%	19	11
Ending Balance	1,044	631

With no new charges, and extra cash going towards the balance, the balances will start going down.  Once you pay off one card, you can apply the payment for that card towards other balances.  You will see your balances quickly reducing.   At the same time, you are saving some each month, so that if  you have an unexpected expense, you can pull from that instead of having to use your credit card.

It is an uplifting feeling in knowing that you have a plan, you can see your balances going down, and you have some money on the side for unexpected expenses.  This process though is a bit like a diet, the first month or so is hard, but once your clothes start felling looser, you realize it is worth it.  Once you see the credit card balances going down and having some money on the side, you realize it is worth it.

My next blog will be ideas on how to add income to your budget.