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7.4 HOW TO GET A HANDLE; UNPLANNED EXPENSES AND PERSONAL FINANCE, THE MAIN REASON PEOPLE GO INTO DEBT

While you might not be in bad financial shape, there is a lot to be learned from the process outlined below.

For people in trouble credit, counselors have a simple method for discovering how money is being spent. The first step is the most important.

== STEP 1: Keep a book in which you write down everything you spend. Every penny! Do this for at least one month, preferably longer. Every dime the household spends should be recorded in that book. This is the tried and true way to identify what counselors call the "money holes."

== STEP 2: Now you know how much you are spending for candy, you can annualize these expenses and begin to understand how much of a bite each category takes out of your total income.

For example if you spend $3 every morning for a fresh cup of coffee and a pastry, how much is it costing you a year? The answer is $3 X 5 (working days per week) X 52 (weeks a year) = $780 a year.

If buying a coffee and pastry each morning is worth $780 a year to you, then by all means you should do it. However, you need to honestly assess the true cost of having breakfast this way. If you decide to spend this $780 each year, you will have to cut expenses somewhere else.

== STEP 3: Categorize your expenses. If you have annual amounts for each category, so much the better.

== STEP 4: Assign an importance to each category. You must pay for some things such as rent or a mortgage, utilities, food, car expenses, taxes, insurance, interest payments on your debts. Add all these up and see how much money is left over.

Then budget a reasonable amount for car repairs, home maintenance, dental work, prescriptions, health deductibles and co-payments, Christmas, and accidents. I would suggest at least $250 a month but $500 would be a better bet, especially if you have high deductibles on your insurance policies as I have suggested. You might have this money automatically deposited into two savings accounts. One account for covering expenses normally covered by insurance, another for all the rest.

After that how much money is left over? This is the money you have to work with. The next list is non-essential expenses, things you could live without if you had to. If nothing is left over you will not go into debt but you won't get our of debt either.

If you have a minus amount then you need to go back and see if you can't reduce some of your non-essential expenses. If the minus amount is bigger than the amount you are spending for non-essentials, you will have to reduce your spending for essentials. For example, could you spend less on food? At SAVVY-DISCOUNTS.com we have recommended a number of ways to save well over $1000 a year on food.

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