Money Management: How to Reduce Debt – by Dan McDonald

Spend Less Than You Earn
Become fully aware of your present pattern of spending. A useful exercise is to use a notebook or a computer spreadsheet and meticulously record what you spent each day, whether by cash or credit card. Do that for at least one month. You may decide the exercise is worth continuing. Note in particular those items you consider optional extras rather than essential.

Organize Your Cash In And Cash Out
You can now refine and formalize your spending as well as your cash inflows it using a computer spreadsheet. An excellent downloadable Excel spreadsheet can be found here. If you are not comfortable with spreadsheets then this is in an on line budget tool from which you can print your spending review.

Review Your Debts
Debts arise from past spending that you did not pay for.

If you are debt free then congratulations. You can now make plans to meet the financial aspects of your goals.

If you are not debt free then review your debt carefully. Some, you may wish to continue and these usually relate to goals that are being accomplished such as a mortgage on a home.

Focus attention on debt that seemingly has no purpose. The best example is credit card debt which has simply accumulated through spending without paying. Reduce this high cost debt as quickly as possible. Resolve to pay off your credit card in full each month to avoid the high interest cost which is usually around 20%. Resolve also to not make credit card purchases unless you are confident that they can be paid off at the end of the month.

Review also your assets. Do you have a savings account that is not earning much interest and can be used to pay down some of your credit card debt. Do you have saleable assets such as jewelry? How much do you use your car? Would you be better off selling it and using public transport?

You should review and summarize assets and your liabilities. One easy way to do this is at this website.

Make Some Specific Financial Goals
If you have no financial goals then it is perfectly OK to spend exactly what you earn. No need to save!

BUT that is risky.

The obvious risk is to not have money for the “lumpy” payments such as car insurance, property taxes, income tax etc. In many cases these can be managed via some monthly payment plan but in most cases there is either a hidden cost or a foregone earning by paying in advance.

The unexpected will always happen and everyone needs a financial cushion.

Consider the unanticipated events that may impact your finances; layoffs, repairs to car or home, medical costs. Best to set a target “rainy day fund” and to always have that amount of wealth in readily accessible form such as a savings account or money market funds.

Now the good part. Identify the good things you want to save for such as further education, a better car, vacations, early retirement etc. There will always be a fine line in deciding whether to acquire such goods by going into debt or to wait until you have accumulated resources to pay for them. Peace of mind is more likely with prudence.

Consider this simple example of accomplishing the goal of a long hoped for vacation. You can save in advance for it and have no increase in debt or you can simply go and deal with how to pay for it when you get back. Which approach is best for your wellbeing and peace of mind? This is one helpful mechanism.

Be disciplined. Pay yourself first. Set up an automatic transfer from your chequing account to your savings account. Use on line banking to monitor your cash position. Periodically transfer money from your savings account to your investment account.

Once you are saving and have a rainy day fund and are accumulating more savings for specific purposes you will need to put that money to work generating interest or dividend income to grow it.

Dan McDonald



Additional Helpful Links

Three reasonably comprehensive sources:

Tips for debt management:

Credit card payment calculator tool: