Understanding Debt: What are your expenses?

Understand Your Expenses

In order to become debt free, it is key is to understand your monthy expenses. Just where does all the money go? This sounds like a simple question at first, but do you really know what you spend your money on? How much you spend on dining out or on movies?

Start by making a list of all your NECESSITIES:

Food (do not include going out to eat or luxuries)
Clothes (same thing, what clothes do you really need)
Rent or Mortgage
Car payment
Car expenses (gas, oil, insurance)
Medical Insurance
Utilities
Other

Now go through your old credit card bills and checkbooks for the last year and figure out what you have spent on each item. What items were really necessities and what expenses were luxuries.

Now list your luxury expenses and what you spent on each of these each month:

Dining out
Sporting events
Movies
Vacations
High end clothing
Car washes
HBO
Etc.

Of course what is considered a need or necessity and what is considered a luxury is going to vary and is also part of this exorcize to becoming debt free. What may be a luxury for some may in fact be a necessity for another. For example, if you must wear fashionable clothes for you job and, if you don't, you will lose your job, then high-end clothing may be a necessity for you. Determining what is a need and what isn't is an important step in reducing your debt. If you aren't honest with yourself and willing to give up some things, you may never be debt free.

Now, there is a basic problem with figuring out your expenses this way and that is that you have to remember all your expenses. Maybe you can do this, but I sure can't. One way to double check that you got all your expenses is to go back through your check book and credit card statements to see if you left any major items out. Some typical examples may be life insurance or other items you only pay once or twice a year. You can also do a further check by figuring out via your check book, how much you spent over the past year and then dividing that by 12. You can also track your spending habits in our Debt Management Software Tool.

To become debt free you must find out where you can cut back. Knowing what expenses are "needs" vs. what are "wants" is key to managing your finances. Looking back at what you spent, where the money went, and understanding what income you need to survive is key to becoming debt free