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After completing steps one and two toward getting out of debt, the third step is to set up a spending & savings plan. Since you should already know your current income and expenditures, this step involves listing them out in an orderly manner.

An easy way to get started is to take a sheet of paper and divide it into one-inch squares. Place your total average monthly take-home income in the first square and label it income. Next, place each of your monthly bills in an individual square and label them accordingly. For example, some of my squares are called house, car maintenance, gas, car insurance, food, dining out, electricity, water, home phone, cell phone, pets, gifts, clothes, student loan, etc. List the monthly amount of each expense in the associated square. Divide annual expenses (such as car insurance) by 12 and put the per-month amount down for those. Be sure that you’ve accounted for everything that you spend your money on, and avoid the temptation to add a “miscellaneous” square. The idea is to plan & identify what you’re going to spend ALL of your money on. Now get out your calculator and enter your after-tax monthly income. Subtract each of the expenses you’ve listed from the total.

If you come up negative, don’t panic. Just note down the amount you’re short in preparation for the next step. Also be sure that you have accurately listed all of your usual income. If you know that you usually get $100 for Christmas, for example, add $8.33 ($100 divided by 12) to your monthly income square.

If you do have money left and you don’t yet have any savings, add a square called savings and put that amount there. You’ll have to decide what total amount you feel comfortable with as a minimum for savings. Once you reach that amount, this amount from this square can be re-allocated to debt. If you’re already comfortable with the amount of savings you have, note down this amount for the next step.

At this point you should have no money left unaccounted for. You also should be able to see at a glance where all of your money is going. The next step will explain how to reduce spending and pay down debt.

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