Jean Chatzky, who appears regularly on the Today show and writes for magazines like Money and Time, shows consumers how to pay down their debt and become debt free by saving $10 a day in a book everyone who carries a debt burden should own and read.

The book is Pay It Down! : From Debt to Wealth on $10 a Day available at Amazon.

If you’ve already made the budget we referred to in an earlier post, you know that spending habits can leave you short of money needed to stay away from credit card debt and bill collectors. Chatzky’s book is filled with helpful and inventive suggestions on how to find the $10 a day; the book also gives clear instructions on how to pay down your debt and to live the dream of a debt-free life.

The best way to start making a budget and analyzing expenses is to start with documentation, lots of it. If you have them, financial records for 12 months is preferable. Luckily, with modern technology and online access to most accounts you may not even need pay stubs, bank account statements, or credit card statements. Utility bills are a good thing to have as usage differs month to month and you want to take an average.

First list all your income. This should include all sources of income, including child support and loan proceeds. This is the easy part.

Next, list expenses. Use categories to make it easier for you to see what proportion of your income gets spent where. Add or delete categories from my list to fit your personal lifestyle. Typical categories are:

* Rent or Mortgage payments (include insurance)
* Utilities – Electricity, Heat, Phone, Cable or Satellite TV, DSL or other internet service, Water and Sewer
* Food – include not only groceries but all food expenses, like school lunches and eating out
* Transportation – car payments, insurance, fuel and maintenance
* Clothing – expenditures for purchases and costs of cleaning
* Medical – include any payment for medical services or prescription drugs, include expenses for eye exams and eyeglasses if applicable
* Miscellaneous – include here any regular expense that doesn’t fit into other categories, such as music lessons for your cat

At this point you can add the totals on both the income and the outflow charts. You probably have already noticed that there is a large sum of money missing and unaccounted for. Finding out where that money goes is your next job. Track any expense you make in the next week. If you stop at the ATM, record what you took out and how you spent it, record every cup of coffee or order of pizza. Any time you spend anything outside of the major expense categories, write it down!

Once you have that total, you can make your budget.

If tomorrow you were out of a job, could you continue to pay for rent, utitlities, food and other necessary expenses until you secured another position?

The only problem with The Micawber Principle is that it doesn’t allow for savings. Sixpence is not much to save over a year’s time. The guideline is to have 3 months of expenses saved to tide you over in case of financial emergency, such as loss of a job. This 3-month figure is separate from your retirement savings.

The only way to save successfully is to have a surplus after you have paid all expenses. If you find you never have anything left over to save, then the next entry in this series is for you. It’s time to make a budget.

“Annual income twenty pounds, annual expenditure nineteen pounds, nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds, nought, and six, result misery.”

The Micawber Principle teaches what we all think we already know, that we should live within our means and failing to do so is the beginning of financial difficulty. It seems fairly obvious but until you do the numbers, you might not realize in what areas you are, in fact, living beyond your means – something that will eventually snowball into real debt struggles.

Start by making a budget. List all expenses that are unavoidable and necessary such as rent or mortgage payments, utilities, car payments, fuel, food and other household expenses regularly incurred. Compare your monthly expenses to your income, if you still think you look like you are in pretty good shape, then make the list that really counts.

Track all your expenditures daily, not the big items from your budget but the little expenditures you don’t think about. Cups of coffee, eating lunch out, birthday gifts, movies, impulse buying… you’d be surprised how these little items add up. Now look at how many times you pulled out a credit card to pay for one of these expenses, probably because you didn’t have the cash available and count in the interest.

Chances are, you will find that without realizing it, your expenditures regularly exceed your income. By putting this purchase on one card and the next on another, you spread the debt around and so it doesn’t appear to be growing very much. But over time you are keeping yourself in debt, even if you manage to juggle the money around to meet all the minimum payments.