Simple 3-Step System That Helped Me to Be Debt-Free

What I am going to tell you is one of the most embarrassing moments in my life, and it happened around 6-7 years ago. It was a winter evening, and I was in an Indian restaurant with a few colleagues. We had a nice dinner, and afterward, when the time came to pay the bill, the usual drama happened. Everyone wanted to pay. The waiter was standing next to me, so I grabbed the bill from the waiter and said to everyone, "Today, I will pay." The waiter politely asked if I wanted to pay with cash or a card. I said card. He went back to get the card machine. I calculated a 10% tip and swiped my card on the machine. The machine just beeped, with a red cross on display.

I thought maybe I had entered the wrong pin, so I tried again. Again, the same thing happened. Then the printout came with the message, "Not enough balance.". I am someone who never carries cash, and that day was no different. But to my relief, something happened. One of my colleagues took out the wallet from his pocket and paid the amount. We all just laughed, and everyone forgot about it by the time we came out of the restaurant. Except me. But out of all this, do you know what the strange thing was?

The reason why I didn't have enough money in the account was not that I wasn't earning enough. I had a good job and was earning a good salary. It was a totally different reason.

But before I tell you the reason, I want to make it clear that I am not someone who spends all my money buying expensive items. I am not a frugal saver also. I come somewhere in the middle of the spectrum. And I guess most of you are somewhere there.

But the one thing that I spend a lot of money on is traveling. So If someone invited me to join for a trip, I would immediately say yes without thinking much. And that drained my account. I still travel a lot. However, I no longer end up in such embarrassing situations. I made a small change in my money habits, which helped me to take control of my finances. And after reading this blog, you can do the same.

My name is Srijith and in my blogs we talk about saving and making money.

The thing I lacked was financial discipline. I had no idea how much I was spending every day or every month and how much money was left in my bank account at any point in time.

But then, this was not a problem for me because I had an infinite money-printing machine in my pocket. My Credit Card. I can swipe it left and right like a Japanese Ninja. The pain is only felt when the payment is due. But there is an even bigger problem.

Let's take a situation. Hope it doesn't happen. But hypothetically, suppose you lose your job right now. Of course, you will not be starving or become homeless. But do you know how long you can survive without a fixed income? How many of you have an emergency fund setup? If you do not have a rough picture of your expenses, you won't be able to estimate how much you need to get through the emergency. And an emergency could be anything. It didn't happen until now doesn't mean it will never happen.

And I didn't want to wait until that happened. I implemented a simple 3-step strategy. The first 2 steps of the strategy helped me to save more, but the 3rd one is the one that made the most impact. It made me a zero-debt person.

What I did was I started writing down my expenses daily. Nothing fancy, just every day, the major expenses in a plain notepad.

And at the end of each month, I did a review to find out how much I spent. And this helped me in 3 ways. Of course, I could get a clear picture of where I stand with respect to my financial situation. I came to know how I was spending and how much was left in my account at any point. So I don't end up in the above said embarrassing situations anymore. But there were 2 more benefits that I didn't expect and were kind of a bonus.

Ramit Singh Sethi is an American entrepreneur and a well-known personal finance adviser. He has a piece of valuable advice on this topic.

"People will get really inspired to budget and decide to stop spending on things like appetizers with dinner. Or they'll buy generic cookies. That's nice – and I definitely encourage you to do that – but those small changes will have very little effect on your total spending. They serve more to make people feel good about themselves, which lasts only a few weeks once they realize they still don't have any more money. Try focusing on Big Wins that will make a large, measurable change. I focus on my critical two or three Big Wins each month: eating out, clothes, and travel. You probably know what your Big Wins are. They're the expenses you cringe at, the ones you shrug and roll your eyes at and say: "Yeah, I probably spend too much on_______."

And I learned about my big wins once I started to track my expenses. The ones that take the most out of my pocket.

If you can target those big expenses and cut them short, that has a more significant impact than saving one or two cents here and there. This is called targeted saving. I just made it up. But you get my point. Anyway, a 3rd good thing also came out of this habit.

I had a newsletter subscription that was no longer relevant and interesting to me. Still, I was paying around $12/per month for it. And I just forgot that such a thing existed. You may also have subscriptions or memberships that silently draw money from your bank account. And when you start tracking your expenses, you can identify and plug these leaks. But this was only the first step. Knowing how much we spend is one thing, and having enough to spend is a totally different ball game. So there comes my second step of the strategy.

I started classifying my expenses into categories. Initially, I went with the 50-30-20 rule and categorized my expenses into 50% needs, 30% wants, and 20%savings.

Then I went a bit more detailed and created different expense categories. So rent goes to housing expenses. Movie goes to the entertainment folder. And then, I went and set a budget limit for each category. But then I made the same mistake most people make when they start budgeting.

I set limits that were easy to break. I went too economical. I wasn't able to stick to the budget and then I made some adjustments to get a more sensible value. Don’t, set $10 a month for food and order takeout every week. Do it realistically. Also, do a periodic review and adjust the values accordingly. Even if you can't follow it strictly, having a budget will drastically improve your financial discipline. But still, there was one piece missing from the puzzle.

I told you earlier that travelling took a major share of my expenses. For short trips, it was fine. But the long, expensive ones always used to put me in debt. I used to pay it then and there with a credit card and then pay the bill later. I knew this wasn't a good practice because the interest on credit cards is the worst. So I executed the 3rd step of my financial plan. At the beginning of every year, I make a rough note of the large expenses that may occur during the year. I will write the goal, the due date, and the amount I need to save each month to get there.

Then I log in to my bank account and set up monthly automatic transfers to a savings account with this amount. Again here also the key is to be realistic with your plans. Even if you don't save for your vacation, save for an emergency fund because vacations can wait, but emergencies won't. It's always difficult and stressful to find a lot of money in a short amount of time.

But there is one last problem. How do these 3 steps efficiently? Of course, you can use a notebook and pen, but that has limitations. There are a lot of budgeting apps and software tools. But most are too complicated, not customizable, and must be paid. The idea was to save money, not spend more. So I designed a budgeting template for myself in my note-taking tool, Notion.

Notion is an all-in-all productivity tool that you can use for task management, project tracking, to-do lists, journaling, and many other things. But the best thing about Notion is that I can customize it to suit my needs. The template is simple. It handles the three key steps which we talked about. It can track your expenses and income, set and monitor a budget, and work towards financial goals. It also shows detailed reports on your spending habits.

I never stopped travelling. In fact, I travel more. But now, I don't have to depend on my credit cards. I am totally debt free, have around 1 year of expenses saved in an emergency fund. I no longer have to sacrifice small happiness in my life in the name of frugal saving. It's a good feeling to wake up every morning knowing that you are prepared for any financial emergencies life throws at you.

Keeping your finances under control is not that difficult. Of course, you can make it complicated by having multiple investments and tax-saving schemes. But, if you can somehow manage to do these 3 basic steps, you will come out better than 90% of the population.

So take a notebook and start writing down your expenses. Until I see you with another blog, take care, have a wonderful rest of the day.

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