Getting Out Of Financial Trouble

If you've got problems with your credit score, you know how much it affects every financial transaction in your life, from your ability to get a phone to whether or not you are paying a ridiculous interest rate for a loan.

What can you do if your credit is bad and getting worse? Your first thing to do is to seek some credit counselling. You can look to non-profit credit counselling, or you can even turn to one of the for-profit companies to help you to get your current costs under control.

Refinancing isn't always the answer; and it isn't even always workable! But your credit counselling agency should be able to help you with that.

Once you have changed your current situation into a manageable state, you have to do something critical: change the habits that got you there in the first place! In most cases, a financial expert will recommend some kind of budget. I find budgets to be generally  unworkable, unless you are the kind that likes to track your expenses carefully (and if you were that type, you wouldn't have had to seek financial help in the first place.) What's the alternative?

While not glamorous, may I suggest a method that my parents used? It does require that you put away your credit cards and bank cards -- no spending on anything (other than your bills) unless it's cash.

The method is simple and straightforward: determine what you can actually afford for "optional" spending categories -- this would include groceries, clothes, your weekly "pocket cash" and extras like eating out or taking in a movie. (Utilities, mortgage or rent, paying off any existing credit card debt, commuting costs and local phone service are not "optional" and should come out of your pay first. What's left over goes to the other categories.)

Have you figured out what's left? Groceries are not truly "optional" because you have to eat, but what you spend on when you buy groceries are -- so make sure there is enough money in the grocery envelope for healthy eating of lower cost alternatives. Once groceries have the right amount, divide the rest into the other optional categories. Take the cash out of your bank account and put it in a separate envelope for each category. This money should cover the period of your pay -- say two weeks. Buy your groceries, or clothes or whatever. When the money runs out, that's it! You're done.

You only have to run out of money once to figure out that you need to think about what you are spending in that category. Too many bags of chips on the grocery bill? The latest designer jeans for your daughter on the clothing bill? Too many Starbucks coffees coming out of your pocket money? Things like this may have to go -- or at least be reduced in frequency.

You don't have to track your spending in advance of deciding on a budget number: just save your receipts for everything you spend once you are using this method and put them in the envelope. Once you've gone through a few pay periods, you'll be able to "fine tune" your budget amounts.

Need to buy something bigger than the weekly or bi-weekly budget amount? This can happen especially with clothes. Then you need to save up some money from the previous pay period or two, and then you can buy your bigger purchase.

While you may not like the solution, think of the great example that you are giving to your children. This is all about learning to live within our means, and live that way comfortably.

You can do it.

Michael Chantrel
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