On Wednesday, we discussed understanding your financial situation. The first step to being debt free is stopping the bleeding. Quit adding to your credit cards, quit spending money you don't have. Today, we're going to take a deeper look at your financial situation and start planning to get out of debt for good. The next step is a little easier, but requires more planning. Grab the last few months of bank statements. Find your credit card bills. Grab your paycheck stubs and a calculator or Excel sheet and set aside a few hours to review all your information. The goal here is to get an understanding of the money coming in and the money going out. Income On your spreadsheet or paper, figure out how much money you have coming in each month. We’ll assume that this is easy to figure out from your paycheck stubs, but be sure to include any assistance you receive, any alimony, child support, freelance work or second job income you have. Whatever this number is, it’s your new baseline for spending. Since you’re not using credit cards anymore, this is the only money you have access too. Period. Expenses Add to your list or spreadsheet all of your expenses. Comb your bank statement and your credit card statements, because we both know that you’ve been charging necessities. Expenses are things you absolutely cannot live without, like rent or a mortgage, credit card bills, utilities, food, car expenses, job related expenses, and medical bills. Your entertainment and social life are not expenses, they’re luxuries, and we’ll discuss those next. Luxuries This is everything else. Shopping trips, video games, eating out, going to happy hours, vacations, and anything else that is not directly related to meeting your basic needs. Crunch the data Ok, so now you have a status update on your finances. You can see the amount coming in, your expenses, and your luxury spending. Hopefully your income exceeds your expenses. If not, you need to come up with a plan to increase your income, reduce your expenses, or both, and fast. We’ll discuss getting a second job and reducing your expenses later, but if this is your situation, please skip ahead to those sections. For the rest of this exercise to work, you have to make your income meet or exceed your expenses. Now that you can see your financial situation, you can analyze what this means to you. What you likely see in your Financial Status Check is that you’re spending more money on luxuries than you can afford and that spending is getting you deeper and deeper into debt. Congratulations, you’ve taken the first step towards financial freedom. I know how troubling this exercise can be. It’s humbling to sit down and look at how you have been living and see how that contrasts with how you can afford to live. It was very hard for us to look at the money we had coming in and see how we were going to have to change our lives to accomplish our goals, but speaking to you six years later, when we are completely out of debt and on our way to our financial and life goals, it’s worth the fiscal trauma.