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How to create a spending plan and stick to it

If you really want to reduce your debt, the first thing you will need to do is create a spending plan, then stick to it.

Your spending plan, or budget, needs to focus on paying down your debt and not adding to it. This may mean cutting up the credit cards and avoiding sales and bargains that are too good to be true.

Set your primary financial goal to be out of debt in six months, a year, two, or whatever it takes. Write it down. You need to stick to this plan until you have achieved your goal.

Here's how to start

Identify and prioritize essential expenses. Limit your spending to the bare essentials: food, shelter, utilities, etc. It may be difficult to define what is essential and what is "luxury," but if you are to get out of debt, you must be tough. Make a list of essential expenses and how much they cost on average each month. Do not forget those expenses you pay only once or twice a year, such as insurance premiums or property taxes. If you can economize and reduce some monthly expenses, do that.

Some specific ideas

You may reduce utility bills by carefully adjusting the temperature in your home by raising the thermostat in summer and lowering it in winter. Turn lights off in rooms when no one is in them. Spend less time on the telephone. Avoid expensive convenience foods and buy raw ingredients to prepare less expensive, more nutritious meals. Make gifts instead of buying expensive items to give away during holidays and for special occasions.

If you set your mind to it, you can come up with many ideas that may save you pennies a day, which add up to dollars you can use to reduce your debt.

Write your expenses down. Write down how much they cost each month. Once you make your list, do not buy anything that is not on it until you reduce your minimum debt payments to below 15% of take-home pay.

Something to note about your monthly debt expenses

By the way, your monthly debt payments are not expenses. Except for your mortgage payment, which is like rent, debt payments are the ghosts of prior months' expenses you incurred when you did not have enough cash to pay for them. Furthermore, they are causing you to pay more and more for those prior expenses because they have hidden expenses — interest and finance charges.

Southern states have more credit card debt. (David Foster/Cashay)
Southern states have more credit card debt. (David Foster/Cashay)

Now take note of your income

Make a list of all your take-home income. This is what you have available to pay your debts and essential expenses. Do you usually get a large income tax refund each year? If so, adjust your withholding at work so you get the money each month when you need it.

Now deduct your monthly debt payments (except your mortgage) from your income. This is what you have left to pay essential expenses. Here is where many get into trouble. If you find that you do not have enough to pay debts and expenses, you will need to take additional action. Some people simply start juggling debt payments by making minimum credit card payments or paying one bill this month and another the next. This is a bad move.

Learn to economize

Revisit economizing.

Look at those expenses again. Economize where you can. When you get to the point where you simply cannot cut expenses any further, you have one of two choices: earn more income or lower your monthly debt payments. It might be necessary to take another job, or have a non-working spouse take a job to bring in additional household income.

Lottery tickets and casinos won't do it — do not waste money. Reducing your monthly debt payments is a little trickier. Avoid the temptation to juggle payments — that only costs more in the long run, and it may damage your credit rating.

Dive Deeper: How to manage debt: The full breakdown

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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