Live below your means. I could end this post right now as that is the key point that some people fail to grasp. If you spend less every month than you earn then you won’t get in to debt. It is that simple. The problems come from many sources but one of the main ones is banks. They sometimes seem to want to throw money at you. You usually can’t go a week without an offer of a loan or credit card dropping through the letterbox. Remember that this isn’t free money, they are making a healthy profit on giving you it.

If you struggle not to spend more than you earn every month then the first step is to make a budget. Write down all of your regular bills and all of your other expenses across a whole month. This will show you exactly where your cash is going. Remember to included everything from bus tickets to chocolate bars. You will be surprised how much is wasted. Obviously there will be some essentials on the list which we will come back to later but there will be a lot that can be cut out. Once you have the monthly figure you need to multiply it by 12 and then add in all the yearly expenses, and include things like holidays and one off treats. This will then give you a rough idea of your total annual spend. Now you need to subtract this figure from your total net income which will hopefully leave you with a positive figure. If it does then you are already doing well but you could probably do better. If the figure is negative then you could have a big problem.

If you have worked out that you are spending more than you are earning you need to do one of two things. Either reduce your expenses or increase you income. It is likely that it will be difficult to increase your income so you will be left with reducing your outgoings. The first thing to do is look at everything listed on your budget and decide what you don’t really need. Can you make do with one night out less a month or maybe cut out the takeaway coffees? You will be surprised how much you can save by making small changes. For example if you take a sandwich to work rather than buy one you will probably save about £4 a day. That is about £1000 a year! If you have managed to cut out any expense you can total it up again and see how it is looking.

You should do the following whatever the outcome as it is always good to save yourself some money. That is to assess your monthly bills, your gas, electric, mobile etc. You can use one of the comparison sites from my earlier post to do this for you. This is where you can make some big savings. You should do the same for your house and car insurance too. Hopefully once you have done all of this the figure from your budget calculations is now a positive one.

Assuming you are able to live within your means you should look to save about 10% of your income every month to cover any unexpected surprises. This means when they inevitably happen you can deal with it without having to get an expensive loan. Look out for the upcoming post on making the most of your savings to see what to do with your 10%.