How to go from debtor to saver?

It is quite common that when people are in a debt situation their first instinct is to enter denial or take action until the last moment due to ignorance or lack of resources to help them make the right decision. In this guide, we will share tips and resources to facilitate your path from debtor to saver.

Part One: Identify Your Situation

How bad am I?

Before anything else, the first thing you should do is identify the debt in your life, both the amount and the causes and consequences. Why? Because the best way to face any problem is to have a complete picture. 

You may take impulsive actions such as using all your savings to pay what you owe, which may be a step in the right direction, but if you are not clear about how you brought debt into your life, or where you are going financially, it is likely. that later you find yourself in the same situation but having used up one of your cartridges. So start by detecting the source of your debt.

How did I get here?

In some cases, debts may be the result of an emergency and a lack of financial prevention. For example, one day our car may break down, and since we do not have an emergency fund to rely on, we end up resorting to a loan or the famous card to pay for the repairs.

However, debt is not always born from an unexpected situation but from the small decisions, we make daily, as well as our habits and lifestyle. How often do you buy online? Are you used to buying desserts or snacks during the week? Do you keep a frequent record of your expenses? How much do you take care of your health to prevent any type of illness? 

Doing a general analysis of your lifestyle will help you identify possible money leaks, or time bombs, that can throw your finances out of balance in the short, medium, and long term.

👉🏼 Exercise: For a week commit to consciously observing your daily decisions and habits. At the end of each day take 10 minutes to make a list of your habits and at the end of the list answer the question: “How is it that these actions impact my present and future finances?” This will give you a good foundation on which to build.

Keep a record

Now, you must not only record what your relationship with money is but how you manage it today. If you have never done financial planning before, or have a monthly budget, then the first step is to record your daily expenses.

You can do this in the same way as the previous exercise, only in this case it is better to record your expenses at the time you pay to train your brain to be aware of your financial behavior. In addition, for this exercise to work, you must do it every day for a month, especially on weekends, since that is when people tend to spend more.

You can keep this record in a small notebook that you can carry with you or use an application like Finerio, which allows you to link your different bank accounts in the reading mode so that your expenses are automatically recorded and you can view them in one place. If you decide to use this or another app that automates the process, we recommend that you still take note of your expenses during the month of the year.

At the end of the month, take at least an hour to review all your expenses. This way you will have a very clear vision of your behavior and how this is reflected in your finances. You may have had variable or unexpected expenses during the month, so it’s worth sorting them out before moving on to the next step.

The summary of your debts

Knowing what your expenses and behavior are is a part, but, to have the complete picture and do good financial planning, you have to know how much you owe and the details of each debt. 

For that, what you have to do is enter the portal or app of your bank or the credit institution that lent you and look for your account statements. If there is no digital way to check, your statement must be arriving at your address, so check the most recent to know your numbers.

Of course, if you have them, do not forget to include the loans that your friends or family have made you. Even if they are not charging you interest, if your goal is really to stop being a debtor, then you have to make sure you meet it in all aspects.

Once you have all your debts identified, create a table where you write down each of them in detail: who you owe, how much you owe, what is the interest rate, how many monthly payments you have left or the deadline to settle, if already you are in default or if you are generating ordinary interest. This will help you prioritize and understand the road ahead.

Check your credit history!

You must corroborate the information you registered, and for that, we suggest you download your special credit report, either at Círculo or Buró de Crédito. In this report, you will be able to find information about the credits that you have assets and detect if there is one that you have yet to pay or that, despite having paid it, is still shown late or as not paid.

Eye! In case you detect irregularities, you should contact the institution where you made the query to request clarification to find out if it is an error or even a case of identity theft.

Remember that having a good credit history or score is essential to have healthy finances and have future opportunities that can range from applying for a car loan to renting an apartment (some landlords request this information to know how responsible you are when it comes to paying).

Check your income

Very well, you are already clear about where the money is escaping, but you also have to know well how and when it arrives. If you have more than one source of income or if these are variable in amount or date, you should obtain an average income based on the payments you have received during the last six months. In this way, it will be easier for you to organize your finances in the future.

Do not forget to consider the fiscal part, such as paying taxes, if in at least one of your activities you carry out a tax regime where you are responsible for declaring and paying taxes. Check with your accountant, or by going to the SAT page, how often you have to make your return so that you always have the flow of your income in mind.

If you have a single source of income and they pay you under the concept of salaries, do not trust yourself, it is also important that you keep a record of how much you get to the fortnight so that you can manage it according to the payments you have to make during those two weeks. 

You can keep a calendar since your fortnight may fall on a non-business day during the year and that means that your payment will be advanced or delayed. Another situation is that it may fall on Friday or Saturday but the next day you have to pay your rent and you cannot wait for the fortnight to fall.

Either way, we invite you to incorporate this income review exercise during or at the end of the same month in which you are going to record your expenses and debts. Just remember not to stress and take it one step at a time.

Part Two: Financial Planning 

Where are you going?

Now that you know what your fixed and variable expenses are, where your debts are and how your income stream works, it’s time to set goals and then design your budget. So the next step is to make a list of priorities.

From your observations and log for the month, make a list that is called “essential” and another that is called “non-essential.” In each list, you must empty your expenses, habits, and commitments thinking about the short, medium, and long term. You can do this exercise with post-its on your wall or with a blackboard to make it easier for you to visualize it and move each element freely until you reach a final version.

When making this list, take the time factor into account. For example, if you have a goal of buying a new room, make it clear on what date you want to achieve it. In addition to precisely integrating the terms and dates of payment of your outstanding debts. With this preparation exercise, you will feel more at ease when it comes time to budget.

The good budget

The next thing will be to design your budget for the next three months. Why three months and not a year? If you have never made a budget, it is better that you gradually test what works for you and what does not. So after three months, you can sit down to analyze how you can improve the budget but now thinking about the next 6 months and so on until you find the correct balance in your finances and lifestyle.

So to shape the monthly budget with all the information that you already have defined:

Income

Write down all your income by concept, define the fixed and variable, and add the dates (even if they are approximate) in which you receive them. You can only write down the total amount but remember that the more detail, the better the administration. 

Expenses

Once again we must categorize the different concepts, to be clear about our payments. We suggest you do it as follows:

  • Fixed costs: 
    • Include in this section your essential expenses for each month, such as rent, groceries, what you spend on transportation, payment of credits, etc.
  • Variable expends: 
    • Consider here the expenses you make on entertainment, clothing, or other types of expenses that vary from month to month. Assign a budget that allows you to keep your finances in order.
  • Annual Expenses: 
    • There are certain expenses that we make once a year and when we forget to consider them, they can affect our monthly budget. For example, paying for an annual insurance policy, college enrollment, automobile endorsement, credit card annuity, or any other annual outlay. The best strategy is to divide them into monthly payments and save that amount each month so that we are not caught off guard the day we have to make the payment.

Long term goals

In addition to the expenses you have in the month, it is convenient for you to dedicate a part of your income to saving your goals in the medium and long term. Ideally, you should start by paying off your debts and from there add other priorities, such as having an emergency fund and saving for your graduate school.

Part 3: Results

Follow up!

A budget that is forgotten in an excel file or in an app that we will never open again is of no use to us. Your mission for the next few months is to continue in a state of active observation. 

Whether you keep a journal or commit to scheduling and reviewing your expenses every Sunday, the best way to take control of your finances will be to be mentally present in every decision and action you take.

Remember that a powerful way to stay motivated is to take the challenge with someone else. If you live with your partner and share the expenses of the house, you can make a budget together, or you can invite a friend that you know who wants to improve their finances to do the challenge together so that they stay motivated.

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