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How to Conduct A Debt Reality Check

02/16/20 | Dana LaRieal Morales

Have you gotten too comfortable with spending? Do you have a budget that you review and stick to on a regular basis? Well, I recommend that you do what I like to call a Debt Reality Check on your finances to ensure you are preparing for your future properly.

It is important that you evaluate what is happening in your household just like you have to prep your house for the winter and spring clean you also have to do the same with your spending and household finances on a regular basis to ensure you account for transitions that may be happening or coming up soon. 

Links mentioned in this episode:

Evaluate Your Current Situation

In most cases when you honestly begin to conduct a debt reality check to evaluate your spending and saving patterns over a period of time, you are able to identify trends and/or problem areas where you may be able to make some changes for the better.  You may even find that you've done even better than you originally anticipated.

Remember, hiding your head in the sand won't make your problems go away, in fact, they often times make them worse.

Over the years my husband and I have done a number of debt reality checks and we have identified several lessons learned that I want to share with you to hopefully provide a few ideas of where you may be able to make some adjustments in your budget as well:

Getting Overly Relaxed In Your Spending

The first tip for conducting a debt reality check is to figure out how much is coming in and going out. Do you know how much you spend on a regular basis? Believe it or not, most people don't. Their thought is, if I have the money in my account I'm good. The truth is you are living in a false sense of security.

If you aren't evaluating your spending habits in comparison to how much money is coming into your account, you are setting yourself up for failure. In most cases, I find that people spend way more than they realize because they have never set down and really looked at the bottom line of their spending.

I encourage you to check out my budgeting course that will teach you how to develop a breakdown of your finances.

Getting Too Comfortable with Your Excessive Cash Flow

Oftentimes, when you are doing a great job of saving money, the thing that trips you up is actually seeing the excess in your bank account. All of a sudden you have an excess cash flow and a "need" for things that really aren't needs at all. As they say, the money begins to burn a hole in your pocket.

One thing that I like to do is to move the excess money to a savings account or earmark it as an extra payment on a bill that we are trying to pay off. That way we aren't overly enticed with the savings we have been diligently producing.

Now you can also take this one step further and go ahead and earmark, as part of your planning, what you will do with any extra money you save at the end of the pay period to a specific goal like vacation, a new car, paying extra on a bill or putting it into your rainy day fund.

Lack of Proper Planning

As a Project Manager, planning is my jam. I understand the importance of proper planning especially when it comes to spending. One thing we noticed is that we do better when we have a clear budget for projects in our household. We also find that doing some initial planning before starting an endeavor is cost-effective because we don't randomly go out and buy things that don't work or aren't right for the job. We also can research and identify the best cost for the item(s) needed.

In a nutshell, plan first and then go and spend. Make sure to determine what is needed to complete your projects in both labor and supply costs. Try not to randomly buy items for projects as you go, instead determine how much you anticipate needing and purchasing it all at once. Don't think linearly instead think on a project-wide basis.

As in most cases, if you buy things on the fly while working on a project you will find that you forget things or end up buying more of something than you actually need. Ultimately all this does is wastes your time and money.

If you don't really know what you are doing with a particular project, I'd recommend planning on a high level and then breaking the project down into small bite-sized parts. That way you can budget for each smaller part to minimize the risk of overspending or spending unnecessarily.

Trying to Do Too Much Too Fast

Sometimes your eagerness can set you up for failure. It's important for you to set realistic expectations and goals for what you can and can't accomplish in a set amount of time and with a set amount of money.

Just because you can do something, doesn't mean you should. Look at your finances and really think about what is most important and place your goals in order from most important to least important. In many cases, you can create a snowball effect of getting out of debt, by determining which items you should tackle first which in turn would allow you to see a win and also accomplish things faster.

Sometimes hyper-focusing on a particular goal is most beneficial because you have all hands on deck and can knock it out a lot faster than if you were just tackling it a little at a time. This is a personal choice, but one that I absolutely love.

Set Small Attainable Goals

I find that many people get overwhelmed when working with their finances because they are trying to look at everything at the same time. Now, that being said, you should look holistically at your situation by acknowledging it as a whole, but you should identify the solution to resolve it in small workable pieces.

Remember you are working to tackle the problem before it gets out of hand or more out of hand. Give yourself some grace, take a deep breath and understand it will get better if you put the work in.

I recommend that you don't try to set a hard and fast goal for the entire year. Instead, set a high-level goal for the year (i.e., pay off your car or pay down your credit card to X amount), then work to identify how you will achieve each of those goals. Is it really possible for you to do that in a year or will it actually take you two years to pay off the car?

My recommendation is to set monthly or quarterly goals. This will allow you to identify where you are overspending and create a plan of how you can reduce it. Then plan what you are going to do with the savings you realize with your plan. By planning monthly it will help you evaluate what is working and what isn't. It also enables you to take life changes into account and make adaptions as necessary to the overall plan.

Eating Out Too Much

Whenever we are trying to save money for a specific thing, we always start with eliminating eating out. Now, some people say it's cheaper for them to eat out than it is for them to cook and I call bull on this. The truth is, it is cheaper to cook even if you are single, you just have to learn how to use your freezer appropriately.

If you have been with me for a while you know I live and breathe by freezer cooking. I believe every household should have a FoodSaver or similar apparatus that can help to preserve food for the freezer.

Meal Planning, of course, goes hand in hand with freezer cooking. It can be done on a weekly basis or on a monthly basis. I'm a fan of weekly planning which helps you adjust to life changes that happen throughout the week.

I have plenty of blog posts that talk further about meal planning and freezer cooking, but in a nutshell, you can stock up on common meal items or ingredients to help minimize the effort it takes you to cook.

You can also double up on various recipes for the purpose of stocking your freezer. Check out my post related to the process of freezer cooking.

Stock Up On Common Expenditures

Stockpiling is a great way to save money on things you use all the time. It also saves you time from having to constantly go to the store.

My family typically stockpiles toilet tissue, napkins and paper towels, toothpaste and other toiletries as well as beverages, condiments and other commonly eaten foods. We also from time to time will stockpile meat or other perishable items and freeze them depending on the sale cycles and what is coming up in our schedule (i.e., holidays, birthdays and other key events).

Summarizing Your Debt Reality Check Process

The key to all of these debt reality check tips is to make sure you are being honest about your financial situation. Don't guess, assume or lie about it, face it head-on.

Create your high-level budget for the year and then plan out the changes you are going to make for the month or quarter. You will also want to get your credit report and read through it carefully.

Make sure all the items are accurate and if you identify something you didn't know was there, don't ignore it call the company and have a conversation on how to resolve it. Many companies will work with you to set up a payment plan to get it paid without crippling your finances.

And finally, make sure you are adjusting your spending habits to align with the reality of your situation. Remember, all you can do is take one step at a time. You can do this!