When debt is a problem, the first step toward a solution is to stop adding to your existing balances. It may be helpful to remove your credit cards from your wallet and place them in a secure but less convenient location so you will be less likely to use them.

Review your most recent credit card statements to identify any recurring monthly charges on your cards. Cancel those purchases that are not essential, such as subscriptions to entertainment services.

Develop A Monthly Budget

Before attempting to pay your debt in full, it is critical that you know how much money you receive and where every dollar goes each month. Use the Budget Work Sheet to take that important step. It will help you identify opportunities to trim expenses, saving money that can be used to pay down your balances. The easiest expenses to eliminate are flexible expenses like dining out, clothing, gifts and entertainment.

As you examine your monthly income and spending, you should also consider opportunities to increase your income — especially if you find your expenses exceed your income. Even if it is only temporary, additional income will quicken your return to financial health.

A budget, or a spending plan, is a tool for establishing financial control and direction. It helps you:

Track where your money goes each month and year.
Avoid wasting money.
Prepare for unforeseen expenses.
Save and invest for long-term goals.

Several financial software programs are available to help you accomplish this task. Utilizing this information will help you more wisely manage your income and expenses to meet your financial goals.

Creating A Budget

Total every dollar you spend for a month and keep track of what you buy. You may be surprised how much you spend and on what things.

Assess your income and subtract your expenses. Gather pay stubs and other income statements, check registers, bank statements, credit card statements or bills and receipts. Divide your annual net income by 12 to determine monthly net income.
Copy the Budget Work Sheet. Use it to record the amounts you plan to spend for the month. Financial planning professionals generally recommend targeting at least 10 percent to 15 percent of monthly net income for savings.
Monitor your spending. Keep written records of your purchases and payments. Record the amounts you actually spent for the month.
Review your plan. Compare what you actually spent to the amounts you planned to spend. How well did you do for the month? Did you have extra money (net cash flow), or did you borrow money by using a credit card? Look for areas that require special attention and reduce or eliminate expenses as needed. Review your spending plan at least once each month.
Adjust your plan. Adjust expenses to reach your financial goals.

Next: Getting Out Of Debt Continued

Updated Thursday, April 03, 2008

HELPFUL FORMS & LISTS

Debt Danger Signals

Budget Work Sheet