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1)   Figure out your expenditures.  It may not be a lot of fun, but it’s absolutely necessary to develop a list of your debt and other monthly payments.  Your list doesn’t have to be a sophisticated spreadsheet.  Try to be realistic about how much you spend on “discretionary items” – the candy bar from the vending machine at work, a latte from Starbucks, etc.  You may need to write every expenditure down for 3 or 4 weeks in order to get a good handle on it.  Also, go through your checkbook or computer records to identify infrequent expenditures and add these to the expenditures. 

2)   Calculate your income.  Figure out your monthly income before taxes and other deductions (“gross income”) and then figure out your remaining monthly income that shows up on your paycheck (“net income”).  If you are paid such that your income changes monthly (for example, based on tips or sales commissions), figure out the average monthly income and use this figure.  If you get paid bi-weekly, you will receive two extra paychecks per year – don’t include these extra paychecks in your monthly income calculation.

3)   Take an honest look at your lifestyle.  Subtract your expenses from your income.  Do you have money left over or do you somehow spend more than you make?  If you spend more than you make or don’t seem to have enough money each month, take a step back and look at your lifestyle.  Are you buying things that you don’t need or could put off?  Can you eat out less often, drive your older car for 2 more years, download 1 song off the Internet instead of buying the whole CD, or make other tough decisions?  In a nutshell, is your desire for money and buying things causing you to live out of balance?  Are you obsessing over money?  If necessary, cut out one discretionary item and put the money towards savings or paying of debt.

4)   Focus on a single debt.  Select one bill – it can be the one with the highest interest rate, the lowest balance, the one that you’ve had the longest, whatever. Just pick one and figure out how much you can pay each month to get rid of that bill.  Decide that paying off this bill will be a component of the budget that you will make in Step 10.  Not only will it be a psychological lift to get bills paid off, but it will help your credit score and help you become more disciplined.

Side note:  Debt consolidation loans are very popular and seem like a good way out of debt.  Before you go there, remember that all of your loans will be consolidated into a single bill that sometimes includes extra fees and/or higher interest.  By using a consolidated loan, you are still left with a large bill that may seem hopeless to ever pay off and you will not see the progress of paying off debt like you would by focusing on a single debt.  So, make sure that you are actually saving money by going this route before you commit.

5)   Use cash for fun.  Pay for your movies, dining out, coffees at Starbucks, and other discretionary income using only cash.  By using cash, you will become more aware of how much you are actually spending for these activities and you will stick to your budget better.  When the cash is gone, you will be done for the month.  Do not cheat with a credit card or by borrowing from a friend.  Remember – this cash will be part of the budget that you prepare, so you need to be either more frugal with how much you spend or more realistic about your entertainment needs.

6)   Don’t show me the money.  If at all possible, do not cash your paycheck and then try to put some of it away in savings.  It hardly ever works.  Use automatic deductions from your company to feed right into your 401(k) or other savings plan.  If this option isn’t available to you, take your paycheck to the bank and put the savings into your mutual fund or savings account right away.  Do this with every paycheck.  This method makes financial sense on many levels:  you have an emergency fund to dip into instead of 20%+ interest credit cards, your money grows at a compounded rate which delivers unbelievable returns over the years, you save on your taxes, and many other benefits.

7)   Be ready to eat.  Dining out can be very expensive and can make up a large chunk of your expenditures.  But you say, I need to eat and I’m tired and I don’t have the time to make something to eat.  It happens and you need to be prepared for it.  Go to Costco, your local grocery store, or your favorite store when you have time and browse the frozen food section.  There are many good selections, including some made by the restaurant that you would go to that night.  Spend a little bit extra and get a top-quality entry like Chinese Orange Chicken with egg rolls, beer-battered halibut, pizza, or whatever else you like to eat when you go out.  Put it in the freezer so that you can pull it out in those times you don’t have the time or energy to make dinner and you’ll be able to save a lot of money each month.

8)   Commit to the 80/10/10 Rule.  Spend 80% of your gross income on necessities, put 10% of your gross income on savings, and give away 10% to charitable activities (we’ll address the last 10% in Step 9 below).  Starting with your net income, allocate money to the mortgage, car payment, the bill you identified in Step 4, the fun money in Step 5, cable/ISP, phone, etc.  Very important – make sure you account for those semi-annual or annual bills that can sneak up and devastate your budget.  To account for these bills in your budget, figure out what the monthly payment would be, take the money out each month, and set it aside for when the bill comes due. 

9)   Give some away.  As discussed above, give away 10% of your income to a charitable organization or as a tithe to your local church.  Besides making yourself feel good by being generous, you will be helping yourself in the long-term.  How?  When you decide to give the money away, you will most likely do some research into who will benefit from the money and how the money will be used.  By gaining this knowledge, you will come to see how much you really have and you will become more satisfied with your financial position and lifestyle.  Naturally, you will need less material things and you will be freed from a money-spending habit to buy the latest thing.

10) Live your budget.  Anybody can make a budget and many people do.  But what’s important is the next step – to actually follow your budget.  Make the list of things you need to spend money on, give 10% of your gross income away, and begin saving 10% of your gross income.  Track your expenditures (yes, all of them, even the $2.00 purchases) and make sure that your budget adequately reflects your finances.  Don’t get upset if your budget doesn’t work at first.  You will most likely need to revise your budget every month for the first several months until you get the hang of the process.  It’s not that important that everything goes right the first month, but that you begin moving in the right direction.

One last thing.  If you are living within your budget, make sure that you spend all of your discretionary cash.  Really.  You need to reward yourself for a job well done so that you will have the mental strength to continue the process during the months when sticking to your budget gets hard.