By September 21, 2011 8 Comments Read More →

Money Management Practices That Keep You Out Of Debt

imageThe best way of getting out of debt is not getting into it in first place. Sounds simple but it’s hard to do it. Partly because it’s hard to be disciplined and not tempted to spend hard earned money on worthless stuff massively and aggressively advertised anywhere you look. But the main reason is because it is really hard to answer two simple questions:

  • Do I live my life below or above my means?
  • Will I have coverage when a payment is due?

If I cannot answer the first question then I am out of control how much I spend – surefire way for overdraft and carrying over the balance from month to month. If I cannot answer the second questions, chances I will hit a situation when I won’t have enough coverage which will result in penalty fee and again… carrying the balance to another month.

I set a goal for myself to create a tool that is simple to use, the tool that does not require me to spend ton of time, energy, and knowledge, the tool that shows me instantly my monthly spending ability.

I ended up with MS Excel spreadsheet with 12 tabs – one per month. Each tab looks similar to this (numbers are fictitious):

Personal Finance Spreadsheet

On the right I have summary table that shows me what I think I need to spend so I can live the life I want – this is Planned column. The Actual column represents the actual spending during the month. Saved column reflects how well I estimated the required spending for each life category, negative numbers in Saved column mean I overspent for specific category.

On the left there is a timeline – one row for each day – where I record my daily spending. Each daily spending record adds up to the relevant category in Actual column on the right so I can see whether I am exceeding my spending abilities or not – no matter what I was actually using to spend the money – check, EasyPay, credit card, debit card, or cash.

Here are the key steps required to setup and run this simple procedure:

  • Set up Microsoft Excel spreadsheet.
  • Plan your monthly expenses (the table on the right).
  • Execute the plan. Record expenses (the timeline on the left) and add to the relevant categories as actual vs. planned (the table on the right).
  • Monitor and adjust either the plan or the spending habits.

I was using this technique since long ago. When I got married we were able to save 5th of our income each month while managing decent life style. Nowadays many things have changed but we still stick to this practice and we were able to manage the lifestyle we want while still saving 5th of our monthly income.

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image by stevendepolo

Posted in: Money

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This blog is dedicated to share simple practices I that get me results.

8 Comments on "Money Management Practices That Keep You Out Of Debt"

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  1. richard says:

    I’ve done this for the last 15 years and can say that it really helps you achieve more with the limited resources you have, if you can keep the habit up as you gain more finances then it keeps you straight. My key advice is to work on percentages, knowing what “your” life costs helps you make the right choices for your career, family and personal wellbeing. Also, don’t be afraid to experiment, or push the boundaries, live life the way you want, it just takes a bit of self control, understanding and finesse.

  2. alik levin says:

    richard,
    Good to hear we share the same personal finances practices that get results. It’s literally rewarding, eh? :)

  3. David says:

    Hi Alik,

    We do something similar at our house but it’s on paper… There’s no real reason not to do it electronically though, so maybe I should put something together over the week-end.

    You’re absolutely correct about needing hard discipline to not go into debt. Living within your means is not easy but it is possible.

    People just need to rid themselves of this obsession they have for buying stuff just for the sake of having stuff.

  4. alik levin says:

    David,
    Right on regarding the discipline.
    I think the obsession is more of effect, the cause though is inability or hard to actually get the idea and answer a simple question – how much i have to spend?
    This simple practice i share here helped us last 15 years to never be off guard and kept us out of debt and related troubles.

  5. David says:

    Good point, Alik.

    If you are aware of how much spending money you have, at any given time, then you’re less likely to get into financial difficulties.

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