The 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):
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.
- How To: Create Personal Finances Spreadsheet Using Microsoft Excel
- 3 Easy Steps For Personal Spending Planning
image by stevendepolo