First Things First - Start with a Budget

If you're going to work at getting out of debt, you need to take a very serious and precise approach to the way you handle your money. Consider what you own, what you owe, and what you spend.

The key to creating a budget that makes sense is to assign every dollar you make to a specific category. Some categories are straight forward, such as a grocery budget. Every week you put aside a specific amount for food and each week you spend that amount. Other categories, such as automobile expenses can vary each week or month. Even though you change the oil in the car every three months, you should still put aside 1/3 of that cost each month. Perhaps you pay a life insurance premium annually. Be consistent in putting aside 1/12 of that amount each month.

Always remember, if an expense is expected, it is not an emergency. Plan ahead and you won't be caught off guard with these expenses. Any money that may be left over at the end of your budget, put toward an emergency fund until you have at least $1,000 on hand just in case the unexpected does happen. This could be an emergency room visit or perhaps the need for a new furnace.

You may fill out your entire budget and come to realize your spending outweighs your income. This is a serious problem, especially if it continues for a number of months. This issue must be addressed as soon as possible. Analyze the situation. Can you cut back on entertainment and eating out? I think so. Is your mortgage over 25% of your income? Maybe it's time to move to a smaller house.

On the other hand, how can you raise the top line? Can you work a second job? Deliver pizzas? Sell stuff on eBay? Plainly stated, if your expenses are more than your income, you need to either make more money or start spending less. It's that simple. The rest comes down to creativity.

I do not intend to sound unsympathetic. I understand people have all sorts of different financial situations. But, financial freedom IS possible. We have the privilege of living in a country where opportunity is boundless. If you feel so overwhelmed with the debt on your plate, that you have no idea what to do, contact a financial advisor who can look at your situation and help you out on a one-on-one basis. If you are in this situation, now is not the time to be investing money in the stock market or saving for your kid's college fund. It's time to prioritize and eliminate this debt one dollar at a time.

Use this form from Dave Ramsey to help you keep track of your monthly cash flow. Remember, the bottom number should be ZERO. Have a plan for EVERY dollar you make.

Next time, I'll go into a little more detail about the emergency fund and why you want to have it.