I had a client who came into the credit union one day who was distraught because she was overwhelmed by her bills and wanted to know what we could do to help. She brought in every bill she had for the month and sat down crying that she also had another bill that she wouldn’t be able to meet. The other bill did not allow a payment plan and it was a fairly large chunk of change. So, after listening to her dilemma, I sat down to work on her budget with her. Here’s how we started.

Step One

We divided a sheet of paper into two columns: one labeled ‘expenses‘, the other labeled ‘income‘. Under the first column we listed all of her regular monthly expenses such as electric, cable, gas, etc. I also included the money she spent on entertainment and eating out in the column, as well as the minimum payments she was making on her credit cards. Once ALL of her monthly expenditures were listed in the left column, I moved to the right and started listing her sources of income. This included her employment income, alimony, and she had some other residual income that we included as well.

Step Two

We added up both columns and got a ‘total’ figure which we listed at the bottom of each column. Then, we subtracted the total monthly expenditures from the total monthly income. In the case of my client, the number was negative. That means that she was spending more than she was making and very often relying on high interest credit cards to do it. No wonder she was so stressed out!

Step Three

Now is the time to rework the budget and try bringing the total to a positive number. The way to do this is to look for places to cut spending. With my client’s budget, I noticed she was spending anywhere from $300-400 a month on groceries and still eating out five times a week. That tells me that she’s impulse buying at the grocery store and the majority of her food probably goes bad. So, I asked about it and she said that she did buy in bulk so that she could save money and use coupons, but that it was often too much for her.

I told her this was an area that we could cut by using the groceries she had and eating out less. I knew it would be difficult so I offered some advice on how she could start.

1.) Make a list and stick to it! There is a difference between wants and needs and this is especially true when grocery shopping. Get only the items that you need for meals and perhaps a snack or two if you know it won’t be wasted.

2.) You can actually freeze things such as milk, eggs, and bread. If you buy in bulk and don’t intend to use them right away, then freeze them. For the eggs, you’ll simply mix the yolk and whites together and then pour them in an ice cube tray, stick them in the freezer and there you go. Milk can actually be frozen in its own container; however, you have to pour some out to allow for expansion. About a cup should do. To thaw out the milk, stick it in the refrigerator and shake well before using. With bread, just stick a loaf in the freezer. Keep in mind that once you thaw it out, you have about a week to use it before it goes bad. The same is true of anything that you freeze past expiration dates including eggs, milk, lunch meat, and cheese.

3.) Get very acquainted with your crock pot. It’s easy to throw ingredients into a slow cooker in the morning before work and by the time you get home, there’s a hot meal waiting for you. Be sure to plug it into a surge protector and keep it on low to prevent a fire. Also keep other objects away from it while it is on.

The next area that I thought we could cut back on was her electricity bill. I reminded her to keep her thermostats turned down during the day (not off as turning them off and on actually consumes more power), and turning off and unplugging appliances when not in use.

Step Four

This step involves putting more money towards debt so that you can free up some cash flow. In my client’s case, she had so much going out every month to numerous, high-interest credit cards that she wouldn’t be able to pay them off at the rate that she was going. So, we looked at consolidating all of her high-interest debts into one lower interest home equity loan. She had the equity to do it, and the numbers worked out to where she would be saving about $500 a month in just credit card payments. Plus, she was able to add on the substantial debt that brought her into the credit union in the first place. However, it is possible to take some of the savings in areas that you are cutting and apply that to the debt until it is paid down. Start with the most expensive debt first and work your way down until you pay off all of your debt. Just remember to keep the other debts current while working to pay one down.

Step Five

Start taking some of that extra money each month and put it towards savings or investments. Build up an emergency fund and then start looking at ways to make your money work for you. Even if it’s just a dollar or two here and there, over time it can add up. Besides, something is better than nothing!

Bottom Line: Live within your means!

None of this means that you have to completely cut the fun out of your budget; however, it does mean that there will need to be some sacrifices in order to achieve your goals. If you want to get out of debt completely, taking an expensive vacation and financing a $35,000 car in the same year is probably not going to help you, especially with the coming recession. So, it comes down to choosing one over the other, which do you want more? Prioritizing your wants will better help you achieve your needs.