How do I Reduce My Debt?
The Power of Cash
By Kelly Cullison
Recognizing the psychological power of cash has changed this client's way of thinking and helped her realize true, measurable results in her efforts to eliminate debt. Here's how....
Five months ago, Jennifer* came to me with over $32,000 in debt. She was barely able to make her monthly minimum payments, and was charging groceries and other necessities on her cards. After we reviewed and discussed her situation, she realized she was at a critical point where failure to take action would ultimately lead to bankruptcy. Jennifer asked for my help to eliminate her debt and guide her through the budgeting process.
Today, just 5 months later, Jennifer has made tremendous progress:
 She has not placed ANY more charges on her credit cards.
 She has created and continues to live within a budget, which we monitor weekly.
 With the help of a debt reduction plan, she has reduced her debt by 9%, to just over $29,000. She will be completely debt free in 3.6 years.
 She feels a sense of relief whenever unexpected expenses occur, since we've managed to set aside an emergency fund.
Before Jennifer could realize any success with her debt reduction plan, she had to get her current spending under control. A key part of Jennifer's success lies in recognizing the power of cash. Jennifer had become accustomed to paying for everything with plastic or by check. When we created her budget, we built in a weekly "allowance." Jennifer's allowance covers all recurring expenses that are not regular bills: groceries, gas, entertainment, etc. (Healthcare, car maintenance, and other irregular expenses are covered by her emergency fund.)
Jennifer takes her cash allowance out of the bank each week. She knows that when the cash is gone, she will have to wait until her next "allowance day" before she will have more. She can visually monitor what's left in a way she never could with credit cards or checks. She thinks harder about each purchase because she has to hand over good 'ole U.S. currency.
In our digital age, we've become desensitized to the value of money. Money has been reduced to figures on an ATM screen, or a balance on a credit card statement. We've lost touch with CASH. By recognizing the psychological power of currency and implementing an allowance system, Jennifer has been able to stay within her monthly budget and make tremendous progress.
----------------------[ TAKE ACTION ]----------------------
Try the allowance approach for 1 month. Follow these steps:
1. Pick a day of the week for your allowance day. Consider your spending habits. If you usually spend a lot on the weekends, you may prefer an allowance day early in the week so you don't run out of cash too soon.
2. Review your monthly budget.
3. Identify all of the items that are recurring, such as food, entertainment, haircuts, etc. Ignore bills, such as power, rent, and phone.
4. Add up the items you identified above. This is your total allowance for the month.
5. Divide by the number of allowance days in the month. If your allowance day will be Monday, divide by the number of Mondays. This is your weekly allowance.
6. Take your weekly allowance out of the bank each allowance day. Don't go back for more until the next allowance day.
* Name has been changed, of course.
Kelly Cullison helps consumers eliminate large debt balances without debt consolidation, credit counseling or bankruptcy.