It is extremely difficult to set goals for your financial future if you do not have a clear idea about your present financial situation. Unfortunately, most people live under the illusion that they truly understand their current financial status. Most people sit down once or twice a month to look at the outstanding bills and instead of looking at the entire amount payable they often look at the minimum amount payable to get by for that month. They pay the minimum amount and are happy that some amount is left over from their income that they can afford to splurge with. This results in the debt continuing to rise but most people are oblivious to this.
To get out of a situation that might lead to a debt trap, it is important to take an inventory of your personal home finances. The first step is to make a list of your expenses during the past year. Examine your checkbook, credit card statements and any other receipts that you may find. If you primarily use cash to make purchases, this might be a bit difficult, unless you have preserved all your receipts.
Categorize your past year spending into essential fixed expenses, essential variable expenses and discretionary expenses.
Essential fixed expenses are payments that you must make each month and the amount you pay per month is locked in. Examples of these payments include mortgage payments, car loan payments or rent. The other kind of essential expenses include your monthly spend on groceries, gas and your energy bills. These are variable because the amount you pay depends on your consumption level. Discretionary expenses are expenses that are not essential. Examples include spending money on purchasing new clothes, entertainment and vacations.
Seriously evaluate your spending patterns over the past year. Do you really need to splurge this year on new clothes and an exotic vacation? Can you walk or bike to work or the grocery store? Can you be more careful with energy conservation? Be honest with yourself and you’ll be able to spot areas where expenses can be cut down.
Take a look at your credit card outstanding amount and make an effort to quickly pay off the entire amount instead of just the minimal amount. Credit card interest rates are among the highest and paying off the outstanding can save you a lot in terms of interest costs.
Taking a little time to plan your purchases and expenditures can help you keep your expenses in control and your cash flow clear, allowing you to handle your personal home finances better and building better savings.