At some point in your life you may find yourself in financial stress, it could be because you earn a low income, you have lost your job or you may have experienced a financial crisis due to divorce or illness. It might have crept up on you after many years of making money mistakes and the end result is a tonne of debt.
However you found yourself in this position of financial stress, the anxiety and depression it brings does not discriminate. It is a sickening feeling.
My financial crisis came after I moved to a new city back in 2012. The following year I found myself out of work for over six months due to unexpected circumstances. At that time I was a single mum, and I had no income and nowhere to live. It truly was one of the worst experiences of my life, I think I would have found it a lot easier if it were just me but it wasn’t.
Luckily I had already made some beautiful friends through my son’s school, they were truly amazing. Still, we moved four times that year, sharing with other lovely parents until we finally had our own place.
I had never really needed to worry about money before that point. I had always earnt a very good income and I had very little debt (all I had was about $6,000 owing on a car that was worth more than that). Over the next year or two while I was in and out of work, and then re-establishing myself, my debt skyrocketed. At its worst I had spent all my savings, cashed in my investments and was approximately $30,000 in debt.
There can be a real lack of understanding regarding what it means to not have enough money or to experience a financial crisis. Not everyone is in debt because they cannot control their spending or live within their means.
If you find yourself in this situation know that you are not alone. A new report from ASIC shows that Australians owe $45 billion in credit card debt, and around 1.9 million people are struggling to repay their debt. It paints a picture of people drowning in debt that they do not see a way to ever repay.
If there is one thing I want you to know is that it will be ok. You will get through this. I did, and you will too. If you need to, constantly remind yourself that your current financial stress is just a moment in time.
Decide to change your relationship with money
The first step is to decide to change your money situation. I know this seems obvious but nothing is going to change until this happens. It took me a little while to fully make this decision, I needed to be ready emotionally and mentally to tackle the situation head on once and for all.
I had some time to reflect on my financial life up until that point and I realised a few things:
1) I was really good and budgeting and saving. I didn’t have much debt and lived within my means but at the end of the day I was saving to spend. I didn’t put any money away for investing but I did pay cash for my lifestyle. It was a good lifestyle, as a single person I lived overseas and travelled the world. As a family we had holidays, nice furniture and a new car.
2) I always had a ‘little bit’ of debt. For some reason up until that point I never let myself be truly debt free.
3) I wasn’t good at valuing myself and feeling like I deserved wealth. This cost me a lot over the years.
I also had an epiphany.. Money is important! I had always thought money was not important and that I didn’t care about it. I had been shown that without money I couldn’t live my values or reach my full potential. I actually had to change the way I think about money.
Things won’t change overnight but they will change
It is going to take time to get on top of things, you are learning something new and the learning curve will be steep. Or if you have been unemployed for a number of months it is going to take a few months to get back to where you were.
It took time to get back on track but once the momentum started building it became easier and easier. It took me roughly one year to be debt free and start investing with a small amount of savings.
Try to resist quick fixes. It took time to for you to get into financial trouble and it is going to take time and hard work to get out of it. That’s ok, challenges build character. By putting in the hard work, and learning how to manage your finances along the way, you are less likely to find yourself in the same position again.
Personally, I am not a fan of debt consolidation so I didn’t ever go down this route. I want you to know that you can get your finances back on track without it. It is my belief that any company that is going to help you consolidate debt is in it for their own profits, not your best interests.
I will add a disclaimer here, while your money situation may not change overnight you can absolutely change your attitude towards money and your situation in an instant.
Create a budget
The first thing I did, and that I do for all my clients is create a budget. I really don’t know if there is any other way to fully appreciate the complete situation without having it all written out before you
Having your financial situation down on paper, in black and white, is fantastic for taking the emotion out of your finances. Financial worries seem much larger and scarier swirling around in your head.
A budget really is nothing other than a tool to show you where your money is going. It is crucial to be honest when creating your budget, it is not a judgement against you and there is nothing to be scared about.
It is funny how things work out because it was due to my financial situation my business was born.
On my journey I met many other people who were also struggling financially. I would talk to them about helping them do a budget, and truthfully their eyes would glaze over. However, when I started talking about values, and spending based on your top values they were very interested and suddenly keen to do a budget.
This all comes down to the fact they thought if I helped them do a budget that I was going to judge their ‘numbers’ or tell them they couldn’t do certain things like buy their daily coffee.
I had people tell me that the anticipation of doing a budget felt worse than going to a doctor’s appointment to find out test results for an illness.
I am glad to say they made it out the other side, quite happily. In fact, they felt really good, even though their situation had not changed yet. These clients started referring me to others.
After doing budget sessions for a little while I noticed that after giving the budget spreadsheets to my clients they didn’t really use them. I started to wonder if it was worthwhile and maybe I wasn’t providing as much value as I had first thought. Then between 4-6 months after the initial session I started getting texts and emails like this:
“I have been so organised with my finances and have made many changes in the way I manage my money and I’ve been really proactive with increasing my earnings. My debts are slowly getting under control. I think about you, and I still feel supported by you every time I sit down to do the regular number crunching. You really did empower me and I’m going strong and moving forward. Still a way from total financial freedom but I’m not lost and anxious any more. Thank you very, very much.”
Even if they were not following a strict budget, the awareness created was enough to provide the momentum they needed. They started booking follow up sessions.
Before we go into the step by step of how to create a budget, there are just a couple of things I would like to say:
Still do a budget even if you know it will show there is not enough money. There is value in the process, you can use it as a plan to move forward, which I will go into in my next post.
There is no need to worry about how much you should be spending on each item at this point, just record everything as it is right now. Comparing to others or using percentages is fruitless, budgeting is not a one size fits all. Your situation is unique, and this is a budget for your situation.
I use an excel spreadsheet for my monthly budget and this is the structure I like to use:
Start with listing all your income that you expect to receive during the month.
It is easy to do if you have a regular income like wages, commissions or welfare payments. If you receive an irregular income you will need to realistically estimate your income to the best of your ability. Also include other income like family benefits and child support if you receive these payments.
Now list all the fixed expenses you pay monthly on separate lines.
Fixed expenses are the ones that do not change from month to month. As these expenses are repetitive you can go back over the last two months of your bank statements and find them easily. They will be expenses such as rent / mortgage payments, phone, internet, insurances, subscriptions, school fees, loan repayments and credit card repayments (and many others). This list can include many other items that will be personal to you.
Now list all the variable expenses you pay on separate lines.
Variable expenses are the ones that vary each month, they include things such as shopping, petrol, spending money and utility bills (and many others). These may take you a little longer to get right but will become more obvious over time. Although I know from experience when money is tight you tend to know where every last dollar is spent.
Calculate the bottom line, this is your income minus both your fixed and variable expenses.
If this is a positive number this is where you allocate the money you have left over to savings and other fun stuff. Or if you have debts you can allocate this money to start paying them off faster.
This is your budget done!
If it is your first time creating a budget it is likely that it won’t be perfect, and that is ok. Over time it will become more accurate.
I know that budgeting can get a bad rap sometimes. Many people resist doing a budget because they think it means restriction, in reality, being in control of your finances leads to freedom. However, if you really don’t want to do a budget at a minimum start tracking your spending, this in itself will bring awareness that will help you to begin changing some of your money habits.
Or if you are feeling completely overwhelmed and don’t know where to begin then find someone that can help you. That is what I do, I work with people that are feeling overwhelmed by their finances, helping them to create a budget and an action plan so that they can move forward.
There will be more on this in my next post where I will give you some tips and tricks to help you get your finances back on track fast.