How to take control of your money (with Video)

April 23, 2017 — 34 Comments

As I’m writing this, I’m looking through the window of our vintage Airstream trailer and onto the beautiful black sandy beaches of the Lost Coast in Northern California. The foggy mountains provide an incredible backdrop as the waves continually pound the coast. I keep thinking we never could’ve done all of this if not for the sacrifices and hard work over the last ten years. This is how I went from $50,000 in debt, to us having enough money to do this. I’ll share these steps with you, so you can do the same.

Here are the six basic steps:

  1. Complete a current assessment
  2. Track your spending
  3. Create a spending plan
  4. Monitor plan and adjust as necessary
  5. Save some money
  6. Attack your debt

1. Complete a current assessment

The first thing you need to do is complete a current assessment, which is nothing more than a quick balance sheet to see where you stand with your assets and liabilities. To do this, gather all financial documents relating to debt (mortgage statements, credit card, student loan, personal loans, etc.) which should include amount owed, interest rates, and minimum payments. Take a look at my example current assessment and begin filling it in with your information.

1.  Fill out the liabilities section of your current assessment with all debts including short term and long term (mortgage)
2.  Fill out the assets section.  List out the money in bank accounts, stock accounts, and retirement accounts

Update the spreadsheet to include all of your short term assets and liabilities for now, so you can see where you stand. After you do this, you can also read how to track your net worth and fill out the long term section as well.

2.  Track your spending

Can you tell me how much you spent on groceries last week? How much did you spend on going out to eat or little luxuries like Starbucks? If you’re anything like me, this step will be incredibly enlightening because you’ll be surprised to see where the dollars are going.

There are a few different ways to track your spending. When I went through this step, I downloaded credit cards statements from the previous two years, categorized each item in a spreadsheet and totaled them up. This gave me a good idea of what was happening with my money, and it wasn’t pretty.

The scary part was that in 2005 which was the first year I went back and calculated my spending, I was making $45,000 a year, which equals $2,561 per month. However,I was spending $2,588 per month which meant I was in the hole by $17 every month… but actually it was much larger than that when accounting for all of the taxes, insurance, etc taken out of my check! I was obviously financing a lot of my living with debt.

There are a few ways to track your spending:

1. Old School: write down every expense on a notebook and carry it around with you each day. You can then add these up manually or into a spreadsheet. Keep each item under a general “category” and try to limit to 6-8 categories total. 

2. Automate: use a site like mint.com which links all of your credit cards and will create a nice history for you

Most credit card websites will also have information categorized, but it’s a little harder as you can’t get them all in once place. Here’s an easy spreadsheet to use a tracker, you can print it off or use it in Excel/Google Sheets Spending Tracker.

If you’re serious about getting your financial act together, don’t skip this step. Most people will think they have a good handle on their spending, but after this step they’ll realize they’re spending like a drunk on Bourbon Street*.

3.  Create a spending plan (Budget)

Now, you must tell your money where to go (like you might already want to tell me where to go). You have to control where your money is spent and this happens through a budget, and not one of those “I’ll do it in my head” budgets.

The key is to keep it simple and not try to have a 100 line item budget, that’s doomed to fail. Take your biggest categories of spending that can fluctuate (clothes, groceries, going out to eat, etc) and create a goal for the amount you want to spend each month. Use your previous month totals from step 2 as a guide to set your total monthly amounts. Here are some sweet examples of budgets:

If you’re really serious about doing this, here’s a pro tip: cash budget, baby. This is the most effective way to stick to your spending plan because there’s nothing that makes your spending more real than pulling out a $100 bill every time you got to Wal-mart or go out to eat. You’ll experience the psychological impact as you see Benjamin leaving your pocket and paying for Chili’s two for two with too many margaritas, and it will start to change how you spend your money.

Check out the full details here on how to use the cash budget, but we literally went to the bank each month, pulled out $1,200 in cash, stuffed four envelopes, and then spent from them. If you weren’t watching your spending closely before, I can almost guarantee by doing this, you’ll quickly find an extra 20% of your dollars back in your wallet. These were our envelopes:

  1. Entertainment ($400)
  2. Food ($600)
  3. Clothes ($100)
  4. Lucy/pet spending ($100)

As you can see, it doesn’t include all of our expenses because some are too convenient (who wants to pay for gas with cash) and others aren’t as easy to constrain (utilities). This was also a few years old and our numbers have changed since then… based on our latest monthly spending report while traveling, we’re over $800/month for food.

4.  Monitor plan and adjust as necessary

Now that you’ve created your spending plan, you need to track against it as the month goes on. As I mentioned in step #3, you may be surprised about how much you are spending on certain areas, so see what happens now that you’re tracking it. Feel free to move your numbers up or down in certain areas as the months progress. Use the same tracking methods mentioned in step 2.

Now, for one of the most important parts… don’t give up! If you do, you’ll be in the same position that you were in before. Use the knowledge you have gained from analyzing your spending and spending plan and keep the momentum going. This needs to be a change in the way you live, not a temporary diet in your spending.

5.  Save some money

At this point, you should have a good idea of where your money is going and how much you have to save. You’ll inevitably have some crazy thing happen right as you start making progress, so you’ll want to quickly build up an emergency fund so you don’t have to use your credit cards. Let’s see… some of my fun ones over the years have included a towed car, minor wreck, sick dog, ruptured achillles tendon and lots of fun house repairs.

Let’s start with two main savings tips:

A.  Create an emergency fund

The minimum amount you need to save is $1,000 to cover unexpected expense like the ones I mentioned above. If you already have this money in savings or you’ve now saved it, it’s time to move on to the big savings fund. You need to build up your emergency fund to 3-6 months of expenses so you can cover major issues like the loss of a job or a major injury. You should keep this money in liquid assets like savings accounts where you can quickly access the money. Now that you know your complete budget from step three, you should know the amount you need to save.

There are two main obstacles for most people on this step. The first, is you’d rather pay off debt. I agree that’s important, so you can always do both simultaneously, but I’d try for at least three months of spending saved before you go full on debt. The other obstacle is for nerds like me who’d rather invest it. This money is your security blanket or your “tell your boss off” fund. Keep it in a place where a major market correction won’t hurt it…. because your boss could become unbearable at any minute!

B.  Pay yourself first

Another important part of building your savings is to pay yourself first. It’s tempting to “save what you have at the end of the month”, but more times than not, you’ll find not a lot of money at the end of the month. If instead, you put money into savings before the month starts, you’ll be amazed at how you get by without it.

Setup an automatic withdrawal through your bank and time it so it happens a few days after you get your paycheck. Just like you’re hopefully doing with your retirement accounts, the money will get pulled before you even had your spendy little Donald Trump hands on it.

6.  Attack your debt

Debt is one of our biggest obstacles to freedom, and there’s a lot of people who profit off of you being in debt. It’s time to cut that, time to kill all of your debt so you’re working for you and not for GM auto financing. I hate debt – especially short term debt. The only debt I plan to ever have in my life is a mortgage debt, but I’d like to even get that knocked out soon. My distaste for debt came from back when graduated college and within a year of working, I was already $50k in debt and had a stupid car loan** which I’ve since vowed to never have again.

Now that you’ve followed the previous five steps, you know where your money is going, how much you have to spend, you’ve saved up some emergency funds and now it’s time to kill the debt.

There are many plans that give you the steps to pay off your debts but my favorite is Dave Ramsey’s Total Money Makeover, and it’s the plan I used to pay off my debt. He has a method called the “debt snowball” where you list all of your debts from smallest to largest on a piece of paper. You can even right this on a poster board you attach to your refrigerator so you know every day what you’re fighting.

Start with the smallest debt on the top of the list and pay only your minimums on the rest of the of the debts. Attack that smallest debt with the rest of your money until it’s paid off. Mark it off the list and do a happy dance. Now, it’s time to attack debt number two – this time using the extra money you were paying off the first debt with — thus, creating the snowball! This really does work and there’s a lot of psychological benefits for doing it this way versus going after the highest interest accounts first. Check out this great template from Kyle to track your debt snowball.

This is how you start to take control of your life, so you can call the shots. You need to have complete control of your money, and you need to be on the same page with your spouse if you’re married. If both of you aren’t bought in on this plan, there’s a high likelihood that it won’t work.

Next, we’ll talk about working smart to maximize your income and also get into investing. If you’ve made it this far, you must be serious about taking control of your money! Seriously, I think I was going for a record long post!!

 

*Incidentally, I had that problem on Bourbon street once and only realized the next few days how much I spent as the credit card charges kept coming

**One of my controversial and popular posts is the 20% rule for buying a car, if you have about three days, you should read through the comments as they’re quite entertaining.

 

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34 responses to How to take control of your money (with Video)

  1. That is a great plan.I need to try tracking the actual spending. The steps you said are good ones to follow. Hopefully, your readers will Break Free with your suggestions. I am working on it.

    • Bindu – tracking your spending really is key. Many people say they feel like they got a raise once they start tracking their spending because they feel like they have a lot more money!

  2. Good tips Dan and I think number 6 is important as it is about taking action step by step. I am sure these tips will help many others.

  3. setting a budget and paying ourselves first really are some of the hardest things for us. This is something we really need to work on.

    • Jon – I’ve definitely been the guy who says I’ll just save what I have leftover at the end of the month… Which turns out to be nothing!

  4. This stuff is going to make a great book! I will be first in line to get it. 🙂 We have already been putting this information in to practice. 🙂

  5. Dan, thanks for sharing. We have over a million in debt, mostly real estate related. It is funny how we got there. I had built a house before we got married, my wife had a house as well, so we tried to sell hers to no avail after we married. We had purchased a few rentals with the hope of flipping them (again to no avail). Having used up most of our cash on down payments and rehabbing, Home Depot got my business when it came to remodeling my lower level. I have a plan that will have us completely debt free in five years if our income doesn’t increase. When our income does increase, it will only shorten the life of the plan.

    • Mervyn – it’s crazy how sometimes we do things with the best of intentions and sometimes they turn out to be the worst things. The sad thing is that if you would’ve tried to do that a few years earlier and sold out in time, you’d probably be positive a million instead of down a million. Sometimes the timing is not on our side.

  6. This is good stuff. When we really look at how we spend our money and on what, it can be eye opening and a bit scary at the same time. That’s why I creat a budget and work hard to stick to it. 🙂

    • I always love hearing your stories of how you prepared to go full time entrepreneur. It’s amazing what we can accomplish with our money and expenses when we focus on them.

  7. Good Stuff! Although I don’t have any debts at the moment but definitely useful to take control of my money =]

    • Tommy – that’s the best time to get control of your money! Of course, most people have to get deeply in debt like I did before they start paying attention to it.

  8. Thanks, Dan, for the excellent advice and the worksheets. I’d take it one step further and review your fixed expenses to see if you can lower them. For years, we paid too much for my homeowners insurance which went up significantly every year. We were, in a word, over-insured. When my husband passed away, and I lost his income, I took a hard look and researched other companies. I lowered my monthly premium by $125 a month. Last year, for good behavior, my premium actually dropped a couple of dollars a month. I did the same with my cable and phone bill, eliminating the extras. I didn’t hurt one bit. So not only keep track of your fixed expenses, but try to reduce them as well.

    • Jeanette – what a tough way to be forced to review your expenses… I feel for ya. Great advice on reviewing your fixed costs. People mention car insurance a lot but not many mention home insurance so I’m glad you did. Thanks!

  9. Hey I have a problem with compulsive buying. How do I help or control it? (If that’s a dumb ?)

    • Hi – not a dumb question at all… that’s probably the biggest problem people have with money. My first question is if you have a regular budget? If you don’t, this will be a great place to start because it’ll force you to see where your money is going. The tough part is sticking to the budget – but if you’re serious about taking control of your money, you’ll be able to do it.

  10. I’ve always been a saver, but in the past year, got out of the habit after a cross country move. Now that I’ve adjusted my my new location and slightly higher cost of living, I’m determined to get back on track with saving. It’s so true that a person needs to simply treat savings as a bill they pay into the account every month. I also used to be so good about waiting until the end of the month to splurge, but that alas, has also gone out the window as my husband and I are not shy about treating ourselves to food and travel. A six month emergency fund is also in place. It would be great to see you do some posts about saving toward a down payment on a house. That’s where I need to tighten my belt and really save more.

    • Jeri – it’s so easy to get thrown off the budget plan. We did the same thing when we were in the middle of home renovations – the time when we needed to be on the plan the most! Good recommendation on saving towards a down payment… I haven’t talked about houses in a while so that’ll be fun. Thanks!

  11. This is a good point! You have to be attentive to your spending and try to control them. Take care of the pennies, the pounds will take care of themselves.

    • Lana – totally agree on taking care of the pennies. So often we just live day to day and don’t pay attention to what’s going on with our money. When we finally focus on it, great things can happen.

  12. Dan,

    What a great and detailed post. I love that you gave so much information, made it simple and provided downloads to really help people.

    Great job,
    Jenn

  13. I went a pretty good while making good choices. Then next thing I know I made a bonehead mistake and bought a new car. Talk about buyer’s remorse. I enjoy the car but, kick myself for not just being happy with my paid off car that was in great shape. Besides my mortgage I only have two debts, a consumer account that is 0% for the next year and the car loan. Should I focus my additional money towards the car and keep paying the minimum on the 0% account? I understand the emotional side of using Dave Ramsey’s approach, but financially it seems like a better choice to pay down the car loan that is costing me interest first.

    • Tom – don’t be too hard on yourself, most of us have been there. I did the same thing when I bought my new car in 2005. My old car was running just fine, but I thought I deserved better! However, one thing to keep in mind is that it’s not a permanent purchase. I went on paying between the minimum of $500/mo all the way up to $700/mo because I wanted to pay it off faster – this went on for two years. Finally, I had enough of the payments.

      I sold the car and bought a much cheaper car. If you will consider this, take a look at how much it’s worth now and how much you’ll lose. If you’ll only lose a couple thousand, it might be worth it. Otherwise, you’ll be paying your car payment every month while it keeps depreciating.

      If you want to keep it, I’d look to see the loan balances before giving advice. If your consumer account is only a few thousand and your car loan is $25,000, then I’d pay off the consumer account first. However, if your consumer account is more like $12,000 compared to that loan, I would probably go for the car loan first.

  14. These are some excellent ideas.

  15. Hi Dan,

    I’m a 29 year old woman living in NC. I make 45,000 a year and live paycheck to paycheck.
    I make a budget every month but some how seem to blow through all my money within the first week or two leaving me penny pinching till the next payday. I would like to save more and like you pay off consumer, car and student loan debt.

    I can say a bulk of my money goes to dinning out and shopping but never have anything to show for it really. Do you have an idea of what a single person’s expenes should look like monthly? Also how about taxes, what would you suggest a person claim for deductions as a single person? I don’t have children but I do commute once a week to take care of some family back home.

    Any advice you have to offer will be much appreciated.

    Thanks!

  16. I love your site and love how you even commented on so many people’s posts. Learned a lot.

    I laugh, because I live on closer to $30,000 a year and some of my friends live on closer to $15,000 a year, because they can’t get a full-time job, but looking at the spending plan. To me, having a strategy for how to change our daily habits helps.

    I cut the cable cord for television and didn’t add Netflix, I dumped the land line and dumped internet, which I can use after work or on my cell phone in free wifi spots. I started hanging up laundry and changing to LED bulbs to decrease electricity use and lowered my thermostat to where it never sees 70 degrees anymore. (I added insulation and new windows in the room I spend the most time, which made that room comfortable at 62 degrees) I cut down trees which were near the house, which lowered insurance.

    All of it affected the whole, but people who don’t make good money need to just suck it in and go to the library and take out videos and books, and dump things like entertainment and eating out.

    I used to drink at Starbucks, but realizing that I was spending over $1500 on coffee in a year did give me a way to reign things in.

    Research every single thing before you buy is my biggest advice to spenders. Read the reviews to avoid worthless purchases and compare costs on-line before going to any store. There are so many scams out there in every product category and I research everything now.

    • Deb – this is excellent! It’s amazing how unnecessary expenses eventually move over to “required” when we don’t pay enough attention. I think your trajectory is going to continue upward as your increased focus will pay off in other areas of life (like your work!). Keep up the progress and keep me updated!!

  17. I ended up making my own more detailed tables for the areas where I am vulnerable – to evaluate those issues at a deeper level.

    Where it says, “eating out” I made a more detailed table for that with each of the places I go, so I can see if I ever go back to Starbucks, etc.

    For my dog, I put “vet annual physical” “vet medical visit” “groomer” “food” “dental chews”

    Christmas presents and birthday parties and wedding and baby showers were always my hardest to figure out, because they cost so much – in gifts, wrappings and clothing and you can’t get out of them easily, but telling people you can’t afford it still works.

    Having those types of expenditures written in a more detailed way helped me to find out if I could do any of it cheaper.

    Information is our friend in this process.

  18. Hi. I came across your blog while doing my research about “how much car I can afford”. I must say so far, it makes sense. I’m 28 years old and I live at home (don’t plan on moving out anytime soon) and at the beginning of this year, I was in debt to the tune of $6,900. This was because of bad decisions: spending money that I don’t have on luxuries (shopping) right out of undergrad. I don’t have any other money vices apart from this (I’m the hoe buddy type). I know this isn’t a lot for some people but I hated the fact that I was in this much debt. Earlier this month, I came up with a plan and it seems to be working so far.
    I feel the need to write all this cos I can’t even tell my family about it because of the shame I feel. But anyways, here’s a breakdown of where I am right now:
    $2,580: Monthly pay
    $1,000: Credit card
    $350: Tithe on gross income (Religious)
    $100: TFSA
    $200: RRSP
    $50: Savings
    $200: Mummy
    $190: Transportation
    $70: Phone bill
    $40: Grooming
    $160: Groceries
    $46: Life and disability insurance
    $9: Netflix
    $11: Bank charges
    $50: Mount Sinai (Hospital)
    $20: Grandmas
    $2: Apple Storage
    This still leaves me with $84 at the end of the month. Using this plan and because I used my bonus from work towards my credit card balance, I’m down to $3,000 and the plan is to pay it off by July.
    I can spend as little as $40 on my weekly groceries because I live at home so my groceries involve just the lunch I take to work. $200 for my mum is my little contribution towards the home front. Good thing she and my dad have things covered if not, I would have to cover more things on my end. The $20 for my grandmothers may seem little but my sister and I send them money every 3 months and because they live in an African country where the dollar translates to a lot in the local currency, it ends up being a reasonable amount.
    I don’t have student loans (thank God for parents who paid cash for my university education) and I don’t have a car but I’m thinking of getting one after I pay off my debt. I read your article about the 20/4/10 rule and it has put things in perspective for me a little. Truth be told, I was looking at a brand new Lexus IS or Toyota Camry but the Toyota Camry is looking like the more likely option.
    I completely understand the reasoning behind the rule but my plan is to be an Uber driver on the weekends so the income from that will go towards the car. I’m not a car person so I know that whatever car I end up getting will stay with me for 10 years plus. Also I used to have a used car that my dad paid for but after numerous monthly problems, I told myself no more used cars.
    I know I’m in better shape than some people (even though I’m not on great shape) but I’m just glad that I’m finally tackling my debt. Also, my total debt was split between 2 cards and it was a great feeling when the one with the lower balance but higher interest rate was paid off just this Friday.
    Wish me luck!

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