There are many books and articles on the next best and greatest diet, or the next best way to get out of debt and get rich.
Just about every personal finance management book or article I have read tells the reader some version of the following: create a budget, spend according to the budget (spend less than you make), and take what you are saving and use it to pay down debt. Once you have paid off your debt, use that money to save for retirement.
This all makes sense, but why do millions of Americans still struggle with setting up a budget to get out of debt? Before we get to that answer, it is important to know why a budget is needed in a first place.
Reason why a budget is necessary to get out of debt
That which gets measured can get managed.
In order to get out of debt, you have to know how much money you make and
how much money you spend. This is where the budget comes in.
A budget is a tool that helps measure your income and expenses. If you don’t know exactly how much you make and how much you spend, you can’t manage your financial affairs. It is that simple!
Most Budgets fail immediately
The first step in creating a budget is to precisely write down your income and expenses. This is where most budgets fail. If you don’t know how much you make and how much you spend where, you cannot create a budget. It is that simple.
Why don’t people know and probably don’t want to know the details of their finances?
After years of consultations and attempts at creating budgets, I started asking myself, why is it that don’t people know the details of their finances?
Try to answer the following questions to see if are in a position to create a budget:
- How much is your mortgage payment exactly?
- How much is your car payment exactly?
- How much exactly do you pay for cable/internet and phone?
- How much do you spend on groceries every month?
- How much is your car insurance exactly?
- What percentage of your income do you save every month exactly?
If you don’t know the exact answers to these questions, you are not alone. There are millions of well intentioned Americans just like you.
- Could it that if you knew the answers, you would become anxious about your life and financial affairs?
- Could it be that not having such knowledge is a lot more comfortable than having a detailed knowledge of your finances?
- Could it be that if you knew the answers, your spending behavior would have to change?
- Could it be that if you knew exactly what you made and what you spent, that information would keep you awake at night?
- Is the process of figuring out how much you make and spend downright scary?
If so much negative energy is surrounding this topic in your life, it is no wonder that creating a budget is so hard. If these questions that I have raised strike a cord with you, read my next article.
In my next articles, I will explain how to identify and overcome mental blocks that prevent you from taking the next step in becoming financially healthy and independent.