Reducing credit card debt usually is not a big topic you find being discussed at a dinner party. No one wants to admit they have not managed their money or credit cards well.

In fact, overspending has it’s own TV series called ‘Big Spenders’ and credit cards debt usually find itself at the root of the problem. The problem of bad financial choices and over spending is not uncommon.

Reducing debt on credit cards does not need to be a complicated exercise. The actions to take are simple and basic. A few calculations and tracking expenses will quickly show you where the money is draining from your bank account. You’ll also discover where you need to begin to take action to keep yourself out of the bad credit zone.

Budgeting Guidelines

Most consumers hate the word “Budgeting” and look at it as a restrictive money item.

That simply is not true. A budget actually tells your money WHERE it will go before the money arrives instead of money going where it wants to go. Budgets are tools nothing more nothing less.

Financial institutions and leading companies use a different kind of “budget” when reviewing loan applications for debt consolidation and approving loans in general. When looking over your financial statement they want to make sure your expenses are within the recommended guidelines.

If your income and expenses are out of balance a flag goes up quickly. This flag puts your loan or credit application in jeopardy or at a higher of being approved.

Keeping your expenses within the recommended budget guidelines plays an important part of reducing your debt and living with less stress.

How does your budget or expenses stack up against the lending communities guidelines?

• Housing 35% – This includes not only your mortgage or rent but property taxes – insurance – maintenance and utilities
• Transportation – 20% – Monthly payments – insurance – gas – oil – repairs – maintenance – tolls – parking or any other transportation needs.
• Debt 15% – Credit cards – student loans- consumer loans- personal loans and any other payments on debt
• All other expenses 20% – Food – clothing – personal items – insurance (health) – prescriptions – doctor & dental visits
• Savings and Investments 10% – Retirement – stocks – bonds – mutual funds – cash reserves – rental income – royalties – art – etc.

Ratios for Debt Income

The debt/Income ratio is calculated by taking the amounts required to pay the regular monthly bills or debts each month and divide that number by the after tax take home pay.

Knowing this debt income ratio or percentage will help you gain a better understanding of your debt load and how it relates to your current financial situation.

For example if your income take home pay was $3500
Mortgage including taxes and insurance – $1250
Auto payments – $325
Credit Cards – $500
Other monthly expenses – $750

You would be spending $2825 per month with a debt income ratio of 81%.

Anything over 50% and you should begin to look for ways to reduce your debt.

Credit To Debt Ratio

Many people close or cancel their credit card account once they have paid it off. Depending on you financial position it may not be the best steps to take. Canceling the account can in fact have a negative impact on your credit score.

The negative impact comes from the Debt to Credit ratio which works similar to the Debt Income ratio but in reverse. The Credit/Debt ratio is the relationship between your total debt and the credit limits you have available. By canceling a credit card you actually raise the amount of money you owe vs. the amount you can borrow.

One item to be aware of in keeping a zero balance credit card open. If you are planning on getting a mortgage a zero balance credit card could have a negative impact on your loan being approved. Why? Lenders may look at the zero balance on the card as the method you will use to furnish the home. This in turn would raise your credit to debt ratio.

Pay Yourself First

The idea of paying yourself first is not a new idea. Read the classic “Richest Man in Babylon.” The key to insuring long-term financial stability and protecting future success begins by paying yourself before anyone else. The task by itself looks easy when in reality few people do it. The fun of “living” paying bills and increasing debt seem to come way before paying yourself.

If you stop and think about it for a moment – do you want credit card companies to prosper more than yourself? Start today paying yourself. Make it a habit! Start small if you have to – but start doing it.

If you have a 401K at work look at increasing the money they take out each pay period. Do it by percentage and not dollar amount.

Creating a Snowball With Credit Card Payments

You’re probably familiar with the picture of a snowball rolling down a hill getting bigger and bigger. You can pay off your credit cards using the same snowball affect.

Take all your credit cards and list them from the highest balance to the lowest. Start paying the minimum balance on all the credit cards except for the card with the lowest balance.

Now get aggressive and take any extra money you can squeeze and pay as much as you can on that card each month until it has been paid off. Even $10 per month will make a difference.

Then start to apply the money you would pay on that card to the next lowest balance. Continue to do that on each card until all the cards are paid off. This is the snowball affect in action.

The extra money you are paying each month compounds as each card gets paid off just like interest and starts hammering away at the balance in big chunks.

Get Financial Smart

Unfortunately much of the school system teaches little on getting financially smart. You do not need to be a money whiz to manage your credit or debt. All that is required is some basic financial knowledge and calculations.

Spend less than you earn and invest the difference – That’s financial smarts!

When the money for your daily household expenses begin to be eaten away on a regular basis due to the repair bills on your car, it may be time to replace the vehicle. Of course this factors in that the repair bills total more than a monthly payment would be.

How can you know for sure IF you can afford another vehicle?

The question – “Can I afford this?” happens to be a question many consumers regularly ask themselves… and not just about what they drive.

Many Americans go through the month without any idea of their average household expenses. Without a firm grasp on your financial position there is no clear way to tell. You must know and track both income and expenses on a month to month basis. It is the only way to know IF there is enough money left over for any purchases.

Budgets – Yes that “B” word is the only way to determine of you can afford to purchase anything. Budgeting includes tracking income and expenses but also includes money for long and short term expenses.

All the income flowing in and regular expenses going out must be accounted for in your budget.

Getting The Budget Started

Budgets do not need to be complicated. Begin by determining how much disposable money you have each month. Don’t take the gross amount. Calculate the disposable income by taking the money you bring home in your paycheck, add in any other income you receive after all deductions.

Tracking expenses – Your next step in building a budget is to look at your regular monthly expenses. Write down all of your bills which must be paid every month.

• House or rent payment
• Utilities
• Phone
• Car payments
• Insurance – Car, Home, Medical

These numbers should be easy to come up with. Although every amount may not be exact each month you should have a good idea on what to expect.

The Hard Part of Tracking Expenses

The “other” household expenses are the ones which are much more difficult to nail down. These expenses are the ones which vary each and every month.

This Expense List includes:

• Gas for the car
• Groceries
• Personal Care Products
• Eating Out
• Trips, Holidays and Vacations
• Gifts
• Etc…

The best and most effective way I’ve found to “get these numbers” is to track your spending for 30-90 days. Most people lose interest after a week or so. For starters site down and write down on a piece of paper what your estimated expenses are. Make it a game and track your estimates to see how realistic your guesses are. I’ve had many people share with me they had no idea they spent as much as they did on fast food or coffee and a muffin in the morning. Giving up and making a few changes put hundreds of dollars back in their control.

Long and Short Term Saving – A Part of The Budget Plan

You now have a starting point of a budget but you are not done yet. Your income and expenses are a portion of budget. Long and short term savings need to be a part of the budget. Savings should be looked at and considered as important as your bills!

The goal should be to save at least 10% of your income. Some “experts” recommend splitting the amount equally into long and short term saving.

I opt for the Emergency Fund approach and first build 3 to 6 months of an emergency fund to act as a buffer for those unexpected expenses.

After the “emergency fund” is fully funded begin to build the long term saving. Don’t forget, the money is coming from the money you bring home. For long term investing consult a professional financial adviser before making any investment decisions.

After going through and building a budget you can answer the question of “Can I Afford This?”

If enough money is left over, after reviewing the budget and can afford an extra payment you may want to make that purchase.

Here is a simple budget formula:

Income – Bills – Expenses – Savings = How much extra money you have to pay an extra bill.

If there is not enough to cover an extra payment? Then you simply Can’t Afford It!

Personal finance and family budgets in particular fail for a number of reasons. The most common factor for the family budget failing comes down to people not wanting to change their lifestyle or better said they way they live and how they handle their finances.

All of us are made unique and get into a comfort zone of “living life our way.” Taking the steps to change our lifestyle can be a scary descision. Success in the world of personal financing is not rocket science. There is a proven way to get yourself out of debt, keep your finances in order and take living to a new level.

I am sure after reading about daily household expenses you a re probably starting to get upset with me. It seems as if some person is trying to change everything my life and I do not have any interest in that.

It is OK to nod in agreement. All throughout our life we’ve lived with a budget even if I may be stretching the use of the term.

• When you fill up the gas tank – the car only goes so far on a tank of gas.
• You come in late for work to often – you lose your job.
• Eat more calories than you burn – and you’ll gain weight

Changing the way to think, view and handle your finances is a welcome shift which can completely change your life for the positive.

The first step in changing the “stinkin thinkin” you carry about money is to decide what you want to do with your money. This is a simple goal setting. Setting a goal makes reaching it much easier.

I am sure you’ve tried goal setting but figure if you cannot pay bills what good is setting a goal. Goals and budgets are nothing more than problem solving in reverse. The goal is the solution the steps needed to get to the goal are the problem.

For example if you want to be debt free in 5 years but currently do not have enough money to meet your current bills and eat, what steps will you take to get to that point. As difficult as the dream of being Debt Free in 5 years may seem, if you really want to reach that goal because it is important you’ll attack the problem to meet the goal.

Let’s look at a different “problem.” If your credit card had a $5000 balance on it and you had one year to pay it of could you? Most would say probably not. What if we added in the fact that if the credit card was not at ZERO on December 31 you would lose your hand. Could you find a way to pay it off then? Most likely you would find a way! The only think that has changed in the problem is perspective!

Time to get a new perspective on money and it starts with a budget.

Many of us have no debt management plan so we have no idea how much we spend or exactly what we spend the money on. Our strategy is to spend as if we can afford anything. It’s much easier when using a credit card than with cash.

The spending wisdom if you can call believes that budgets are for nerds who track every single penny on a spreadsheet or with a calculator. Knock it if you want but it does work!

Any steps to manage debt must come with a plan. By tracking your spending and purchases you can begin to take steps to reduce your expenses. Cutting those extra spending dollars with allow that money to go toward paying down debt like credit cards or other consumer debt.

In our house we keep all receipts and write down what we spend each day. At the end of the day we categorize all of our spending onto a sheet with columns to track what and where the money is going. Once a week all the daily totals are put on a spreadsheet track things on a monthly and yearly basis.

It takes a few months tracking it this way to really see where your money is going. That‘s where the problem comes in. Usually after a few days the debt plan loses it’s appeal and people stop working toward managing their finances.

The goal is to track your money not for the sake of tracking it, but as a means to buy what you need and buy the things you want, without paying extra for them.

You probably have a good idea of what the monthly expenses are. It’s all those extra household items like the car, gas, eating out, groceries, clothes, etc. In order to fully manage your debt part of the plan starts with tracking your spending.