Are you ready to pay off your debt but have no clue where to start?
Read the first post in my series about paying off your debt, then read through this series until you get to this post, our fourth in the series.
You don’t have to experience a life-changing debt event to end up in debt.
Simple consumerism or spending more than you earn for a long period of time can put you in an equally horrible debt position.
Many people don’t realize how their small decisions can add up into a big problem until they experience hitting rock bottom or get that dreaded wake-up call alerting them to the now bigger issues.
What Is A Money Sinkhole?
I personally think these types of money issues are very much like a sinkhole. A sinkhole forms when an underground water source slowly eats away at what supports the ground above.
At first, you’ll never notice a problem because there are no visible signs of problems. As the support continues to be eaten away, the ground starts slowly sagging.
At this point, you’ll start to see small problems like cracks on concrete and tiles in your home. Then one day, without notice, the surface collapses into the hole below, causing massive damage. When the sinkhole shows itself is the moment that most people realize they have a problem.
Hopefully, you haven’t actually gotten to the point of a money sinkhole swallowing your financial home, but there is a good chance your money habits are slowly eating away at the ground supporting your financial home if you’re in debt.
Instead of continuing these bad money habits that will eventually lead to your home being swallowed by a sinkhole, you can make a change after recognizing what financial problems lead to money sinkholes.
So How Do You Find A Money Sinkhole?
It’s hard to find a money sinkhole when you personally can’t see any visible signs of your spending problems. Luckily, you can you can find these problems before you get too far into debt. So where do you start?
The first step to discovering is to track your income and expenses. You’ll want to have at least two months of data in order to weed out any anomalies in the data.
The more data you have the more accurate your snapshot of your situation will be. Here’s a couple of quick ways to figure out what your prior income and expenses were in case you haven’t been tracking your finances.
One way to track income and expenses quickly is to use an aggregation tool like Mint.com. Simply set up a Mint account and link all of your financial accounts (banks, credit cards, loans, etc) to the Mint interface. Once you’ve done that, categorize any uncategorized transactions and take a look at the data in front of you.
If you’d prefer not to use an aggregation tool, you can do the same thing with a bit of time. Take statements from your financial accounts for the last few months and a piece of paper or an excel spreadsheet. Then, simply classify all of the line items on your statements into income and expense categories.
Once you have your income and categorized expense data you can start looking at the numbers to see what type of story they tell. The first thing you should check is whether you’re spending more than you earn.
The next exercise is to order your expenses from the largest expense category to the smallest expense category. If you spend your money based on your values, you should see the things you value highest at the top of your expense list and the things you value the least at the bottom of the list.
If that isn’t the case, you have some work to do.
The next step is starting to take action by making small changes. You can read about it here. You’ll be surprised how quickly they add up.
Chances are you can make some changes immediately that you won’t even notice, so we’ll be able to get an easy win up front!
Looking back, have you ever experience any money sinkholes with your finances? I’d be interested to hear what you find either in your past or present finances.