Filed under: Personal Finance, Lynnette Khalfani-Cox
My #1 New Year's resolution for 2011 is to:
A. Decrease debt: 69%
B. Increase savings: 7%:
C. Improve my credit score: 18%
D. Decrease my dependence on credit cards: 7%
It's high time Americans got serious - and I mean really serious - about becoming debt free. Studies like the NFCC's often show that people want to get out of debt, say that they plan to pay off debt, and yet fail to follow through. As a Money Coach, I know that LIFE often gets in the way of people's best intentions.
LIFE is an acronym that describes the four ways that your budget gets out of whack - forcing you to spend more than you planned for the month, or causing the best-laid plans to get scrapped because of unforeseen events and unanticipated situations. When emergencies and other unexpected things happen, you can wind up in debt - or unable to pay off that debt you've vowed to get rid of.
But you can counter this problem with careful planning and by recognizing how LIFE events can impact your budget. Here is what LIFE means:
-Listed items are under-calculated.
The "L" in LIFE stands for expenses that are "Listed" items in your budget, but your numbers are actually way off the mark. Unfortunately, many individuals who draw up budgets don't use very precise numbers.
People have a tendency to underestimate their spending. Take cellular phones, for example. If you own one, you probably account for it in your monthly budget with a figure like $49.99 - or whatever your basic monthly charge happens to be. But do you find that you regularly talk beyond your allotted cell phone minutes, so that you wind up with a mobile phone bill closer to $80 per month? If so, you need to adjust your budget and put in more realistic numbers for this expense.
Household bills, like electricity and gas, are another area where people get tripped up. They include these expenses as a flat cost in their budgets, say $100 a month. But their heating or air conditioning bill is routinely far more than that $100, especially during times of extreme weather.
-Impulse purchases seduce you.
The "I" in LIFE stands for "Impulse" items that you buy on a whim.
We all make impulse purchases from time to time - but some people do it on a regular basis. It may be that you're reading the newspaper and you see a discount coupon for a retail store you like. And before long, you're at the mall, shopping. Other times, you may be surfing the Internet looking for information, when a pop-up advertisement seduces you with some intriguing offer. Next thing you know, you've whipped out your credit card to buy some product or service. You've also derailed your plans to become debt-free.
-Forgotten bills surface.
The "F" in LIFE stands for "Forgotten" bills.
Some bills get paid annually or perhaps twice a year. If you're not careful in your planning, you can exclude these expenses from your budget, and then when the bills come due, you realize you forgot all about them.
Has this ever happened to you? If so, don't omit from your budget those expenditures that may not be paid on a monthly basis - things like your homeowner's or auto insurance, the maintenance fee for the vacation timeshare you own, your gym membership, or any annual fees you pay to belong to personal, professional or civic organizations.
-Emergency or unexpected events occur.
The "E" in LIFE stands for "Emergencies".
Lastly, there are obviously times when emergencies - like a burst boiler unit - can ruin a budget. Try to minimize these events with preventative measures, such as regularly servicing your boiler, having routine maintenance done on your car to avoid breakdowns, and making periodic visits to the doctor to stave off serious medical conditions.
Once you realize that LIFE happens to everyone, you can take some steps to safeguard your budget. Start by reviewing your finances and taking a hard, realistic look at your overall spending habits. If you've been vastly under-calculating listed items in your budget, make the necessary adjustments. If you make too many impulse purchases, carry less cash with you or put your credit cards away, to minimize the temptation to buy on a whim. Also, fine-tune your budget so you don't forget any one-off bills. And finally, consider what you can do to reduce those "emergency" situations - especially the kind that can be cured with a little preventive medicine.
Getting out of debt will only happen with a plan and by exercising the diligence necessary to stick to that plan. I know that from first-hand experience, having dug myself out of $100,000 in credit card debt in just three years. I can tell you unequivocally that it's a wonderful feeling to be debt free.
So let today mark the day you get serious about having zero debt too. You can begin now, simply by thinking for a few moments about your own budget busters and answering two basic questions. First, which of these areas in LIFE seem to consistently ruin your finances? Write them down. Now, most importantly, ask yourself: What can I do to prevent these problems -- and others that have kept me in debt -- from recurring in the future? Write your answers down again, and refer back to them frequently.
Once you can answer these questions, and live with the answers (read: solutions) you've created for yourself, you're well on your way to reaching your goal of becoming debt free.
Lynnette Khalfani-Cox, an award-winning financial news journalist and former Wall Street Journal reporter for CNBC, has been featured in the Washington Post, USA Today, and the New York Times, as well as magazines ranging from Essence and Redbook to Black Enterprise and Smart Money. Check out her New York Times best seller 'Zero Debt: The Ultimate Guide to Financial Freedom.'