This is the math part of the plan. It seems like everybody hates math these days. To make matters worse, we're going to be dealing with some scary numbers.

Luckily, it won't take long to do this math and when you're done you should have a much better understanding of your present and future financial situation. Here are the two numbers that you need to know:

  1. Your monthly income
  2. Your monthly expenses

These two numbers can usually tell you everything you need to know about your money. As long as your expenses are greater than income you have problems.

Income

How much money do you bring home in one month? This number can sometimes be a little tricky to calculate.

I only get paid once a month so it's easy for me. If you're also only paid once a month, then just make a note of your net pay and you're done with this part.

The first problem has to do with the number of paydays in a month. If you get paid once a week, you might find that some months have five paydays while others only have four.

If you get paid every week, multiply your paycheck by 52 and then divide the result by 12. If you get paid every two weeks, multiply your paycheck by 26 and then divide the result by 12.

The other problem with calculating your monthly income only shows up if you get paid different amounts from month to month. For example, my wife is paid a monthly commision based on her sales.

If your paychecks vary from month to month, you'll need to average them out. If you're making the same this year as you did last year, divide last year's net salary by 12. Otherwise, make an educated guess and adjust the number as needed.

Expenses

Now for the scary part. What is the total of your monthly expenses?

We know how much you bring in every month, now we'll figure out where it goes. Include everything that you can think of here.

Start with the minimum payments on your credit card bills, then your living expenses like rent, car payments, utilities, gas, and food. Separate how much you spend on groceries from how much you spend eating out. Don't forget other expenses like club memberships, dry cleaning, and leisure activities.

You'll surely forget a few things, but that's OK. As you go through the next month, try to think about this list every time you spend money. If you forgot something just update the list.

Now think about these two numbers carefully. You need to do everything in your power to increase your income and reduce your expenses. This might mean a pretty significant lifestyle change.

Spend less than you earn or you'll never get out of debt. Just be sure you don't cut out all of your leisure activities. If you take all of the pleasure out of your life, you won't be able to live with this plan.

Chances are you've already done what you can to reduce expenses. With that in mind, the final step of this plan will deal with a few ways to increase your income.