Staying With The Debt Reduction Plan - Eliminate your Debt for Real

Great!  You have determined where your debt problem lies, and either by yourself or with the help of some pros you have developed a plan to get you out of debt.  You know your expenses, possibly restructured your debt and you're ready to go.  But here's the hard part... execution.

Getting your debt in order is more than a just compiling some numbers and generating a plan, it often requires a fundamental lifestyle change.  Nobody likes to watch every dime, so how to make it easier?  Use separate accounts at your bank for distinct purposes! 

Separate bank accounts for debt reduction

You should set up separate accounts at your bank for the different needs explained below.  It's easy to do.  Just sit down with someone at your bank and they will be happy to help.

You MUST set aside the proper amount of money to cover your monthly expenses and debt repayment.  Expenses like your mortgage/rent, heating, insurance, car payments, electricity, food, gas, the basics.  Add to that your debt repayment money and you know what you have to cover every month.  Just put the money in your checking account every paycheck.  Make a deal with yourself that you will not go into that money for any reason except the basic monthly expenses.  For convenience you can charge your gas and groceries on a DEBIT card, not a CREDIT card! 

Now, set aside money in a separate account for a 'rainy day fund'.  You need to have a little cushion in case things like the car breaks or you have a high co-pay on a prescription.  At first the account will have a small balance and hopefully luck is on your side and nothing too big comes up early.  The rainy day fund is for unexpected expenses only.  Once it gets to a size you think is good (2-3 months after-tax pay is good) you can divert funds elsewhere until you need to replenish money as needs arise.   

Now can you spend what little is left?  Not so fast!  You know you want to take at least a modest vacation, buy a few clothes the family will need, Christmas and birthday gifts, school activity charges, and so on.  Estimate what these expenses are and set aside the money in a separate account.  Take these expenses ONLY from this account.

Now, you have a little left over (hopefully!) for discretionary spending.  Take that money in CASH every month.  DO NOT CHARGE DISCRETIONARY SPENDING.  It's too easy to lose track.  You can go to the movies, to dinner, whatever.  But once the cash is gone for the month, it's gone.  No dipping into other accounts!

Staying with the plan

Your getting out of debt plan includes knowing all your current monthly expenses and how much you need to pay toward your debt every month.  Hopefully there's a little left over.  The trick is not to be sucked into spending on things you don't really NEED.   

In the section Psychology of Easy Credit we touch on how marketing companies try to create demand for a product, and how credit card companies create easy funding for those products.  It's all to easy to fall prey to these messages that bombard us all day, every day.

There is a light at the end of the tunnel.  Getting into good financial shape is a lot like getting into physical shape, it's hard at first but over time you can really see the results.

Nobody likes discipline, but it takes a some to not buy that great new MP3 player or flat screen TV that there's such a 'great' deal on.  Once you get back on your financial feet and have your debt paid down then you can get the extras here and there, but PAY CASH.  If you can't pay cash, you can't afford it!  But by then you will have the financial discipline to decide what you really need versus what you want.

Set up the separate accounts and manage your money. You're not looking after every dime, but you'll cover your expenses while setting yourself up nicely for the future.

All the best to you!