How to get out of debt, step 2:
Analyze your finances: Organize monthly expenses by category and tier.
Previous: 1. Detail all main and alternate income sources.
2. Categorize monthly expenses and get your finances organized.
Ingredients: any printed information you have, such as receipts, ledgers you have been keeping, credit card statements, bank statements, your software program information.
Continuing in the first phase, we look at our finances, organize them according to category and, later, priority. Using our rule of solid accountability, list all of the categories of expenses you have had over the past three months. Whatever you have paid any money for, put it on there. There will be some expenses that were one-time expenses, such as a wedding gift or so forth. Put them at the bottom of the list. We are looking to categorize monthly expenses that are consistent expenses, just as we look for consistent income in the previous step.
Now we are going to categorize them into three tiers. The first tier includes all of those expenses that are essential, such as groceries, rent, tuition, gas, oil and utilities and so forth. These are the things that you cannot live and function without. Cable TV would not be on this list, while telephone service and internet most probably would. These are usually cash expenses. Other more expensive things are where credit cards really tempt us.
The second-tier expenses are those which are important but not essential. These are things such as piano lessons for the kids, health club memberships, clothing, and so forth. Cable TV may or may not be on this list, depending on how you use it. This is highly subjective, and a good rule of thumb is to include anything which improves your quality of life and personal growth on an ongoing basis. A visit to the spa, as beneficial as that may be, would not qualify because it is not ongoing. It can be delayed until such time as you are out of debt.
The third tier expenses are those which are either one time nonessential expenses, or luxuries. These would include buying a fancy home entertainment system, a big vacation trip, Broadway shows, a new Jacuzzi and so forth. These are things we love, provide highlights to our lives, but are not in any way required in our usual routine. You will notice, as we begin to look at the amounts spent in the next step, that these tend to be the most expensive things we do.
Now, you know how to categorize your expenses and finances, organize them by tier. Let's do that by putting all of the expenses you listed at the beginning into the appropriate categories. There is no right or wrong here, so simply use your judgment and make decisions. Computer software programs will allow you to categorize each expense as you put it in, so you can view your monthly expenses by category later. What you're simply doing here is creating a larger, simpler three tier system that will enable you to prioritize your expense restructuring.
Next: 3. Create a monthly expense chart detailing amounts.