Budgeting & Paying off Debt

Hi Friends!

Thanks for the nice feedback on my post yesterday – and I’ve gotten a few emails from fellow Dave Ramsey fans – how nice! His Baby Steps have really helped Jason and me (and others too!)

Today I want to try to explain how we set up our budgets – this was key in helping us pay off our debt fast. Before I get into this, I want to briefly explain how Jason and I have our bank accounts set up. Depending on your situation, you may need to adjust how you do your budget.

Jason and I have 2 accounts: checking and savings. We do not have separate accounts, we do not each pay a percentage of the bills, etc. We each deposit our paychecks into the checking account and pay bills from there. We have always done it this way. To be honest I don’t think I could (or would want to) keep track of more accounts than this.

To get started, we did the following:

1. Print off your bank statements from the past few months.

2. List your income amounts

3. List off your necessary expenses

  • Mortgage/Rent payment
  • Insurance
  • Gas/Electricity
  • Phone/Internet
  • Water
  • Car loans, credit card debts, etc.

 4. Add up/estimate the amount of money you use on certain categories:

  • Groceries (you could make a separate category for toilet paper, toiletries, etc)
  • Gas/car repairs/bus or train passes/etc
  • Other (clothing, restaurant meals, booze, etc)

Things like groceries and gas can be different amounts each month. One month you could spend close to $400 on food, some months less, some months more. Be honest with yourself though — can you really live off of those amounts? For example, I would never budget our food (which includes toiletries and any restaurant meals) below $300. I’ve tried and I couldn’t do it. The goal is not to live miserably.

Here is an example  — please note that these numbers are all made up – and please know that you may not need all of these categories, or you might need more – daycare, prescriptions, health insurance (we both pay for health insurance through work), etc.

 March Budget

(Fun money is “extra” money – can be for going out to eat, birthday gifts, etc)

 So look at the totals:

  • Monthly income            $4500/month
  • Monthly expenses         $3840/month

 That is a difference of $660/month – that money would then get paid towards your smallest debt (and start your snowball) or it would start your $1000 emergency fund.

Maybe you are thinking “there is no way I have any extra money each month” — I dare you to type it all out and see for yourself. If anything, you’ll see where your money is going! We were amazed at how much money we actually had — we were just spending it on nothing.

 Now lets go back to the Debt Snowball example from yesterday:

If Bob/Jane had $0 in their emergency fund, the $660 could get used towards that. Maybe they could sell a few things and get to their $1000 emergency fund in another month or two. After that, they can attack the debt. With an additional $660 each month, their first card (Macy’s) could be paid off in a little over 2 months:

  • 100 Macy’s payment + $660 “extra” each month = $760 monthly payment to Macy’s. $2000 (balance of card) /$760 = 2.63 months

After the Macy’s card is paid off, they would start attacking the Visa card (but still making minimum payments on the car loan and student loans). Their Visa payment should be $910.

  • 150 Visa payment + $760 “extra” ($660 “extra” money + 100 Macy’s)

Now — just because that month Bob and Jane have $660 extra, does that mean they have that every month? No – it could be more or less. Jason and I have some bills that are due every 3 months — so when those bills are due, we have less “extra” money.

But if Bob and Jane manage to continue the $910 payments on the Visa — it would take them less than 6 months to pay off that card! In this example, Bob and Jane could be paying off their Macy’s and Visa card within 8 months or so. Then they could start attacking the car loan — making payments of about $1310!

But do you see how quickly it can move if you work at it?

The first few months of budgeting really sucked. We made mistakes and had to scramble a bit, but after a while, it becomes second nature. And just because you have $400 set aside for food, doesn’t mean you have to use it. You could have $50 leftover, which you could add to your debt payments, or you could use it on yourself – we usually went out for a celebratory dinner at the end of the month – we’d use up our food money. That didn’t happen every month because there wasn’t always extra.

The idea is to budget what you need money for. You know when your Mom’s birthday is, so if you want to get her a gift, budget in $20 or $50 or whatever you normally spend on her. There are months when we get “extra” paychecks — meaning there are 3 payday Fridays in a month. That really got our Debt Snowball rolling.

Like I said yesterday, I am not a financial counselor. This is all what I learned from TMM and this is how Jason and I did things. We were drowning in the debt payments, but we were never behind on payments. Dave gives some advice on what to do in those situations. I remember him explaining that even if you are behind on your credit cards/student loans, you need to take care of yourself. That includes: food, shelter, clothing.

 Again, I hope this isn’t an overwhelming post. Budgeting seemed out of control at first, but after a while we got a better handle on it – and as you do it, you’ll get better and better at it. Tomorrow I’ll share with you some more ideas on what we did to pay down on our debt — but honestly, budgeting was key — and STICKING to the budget was super important.

Give it a try!

35 Responses to “Budgeting & Paying off Debt”

  1. Brittany (A Healthy Slice of Life) Says:

    I love listening to Dave Ramsey’s show on XM- so entertaining. I think he’s a bit extreme in his ways, but overall he sends a wonderful message!

    • Holly Says:

      I’ve never listened to his radio show – although I’d like to!

      It seems like there are good things/bad things about any financial planner

  2. Cathy K Says:

    thanks for this “series” of financial blog posts, holly! i find them super interesting!
    we have the same system: two accounts, and both paycheques go in. works for us. but just like a fitness or nutrition plan, everyone is an experiment of one. so after a few months of trial and error, financial planning would become easier, too, i bet.
    thanks again for sharing your experience and what has worked for you – you guys are a success story!

  3. Joanne Says:

    I’m so bad at budgeting. I can’t do anything as formal as you have laid it out. All these years and what seems to work for me is that something clicks “CUT BACK”. Fortunately, I do .
    I think one HUGE key to managing expenses/dept is.. don’t use the credit card unless you can pay it off 100% complete when the bill comes. The finance charges are way too outragious to hold money on that card.

    • Holly Says:

      I agree with you about the credit cards — we cut ours up and followed Dave Ramsey’s budget plan — and we’ve paid off $35,000! We haven’t charged one single dollar since then.

      • bakebooks Says:

        Despite all my student loan debt – I DID pay off my credit card recently. That felt good…I’m just afraid of an emergency or moving again that I’ll have to resort to it.

        I like how you have this laid out here. Y’know I’ve been putting extra money towards my student line of credit loan because that’s the biggest one at $60,000 and has a HUGE interest rate. But now I realize that I should probably just put extra money towards a $5000 loan payment through a bank I had instead. It would feel good to have one less payment…I guess the BIG one is the one that freaks me out (and kills my cash).

      • Holly Says:

        Well you need to be comfortable with what you’re doing — but I really liked knocking off the smaller debts and then having more money to use towards the bigger debts.

        And you should be proud of paying off that credit card debt! That is huge!

  4. Lisa Says:

    It’s amazing how fast it can go when you figure out the details and focus on it 🙂

    I did that with my students loans and then with my car. It’s like total freedom to check those debts off!

  5. Hollie @ Lolzthatswim(andRun) Says:

    I started to budget more minor things such as grocery shopping and I found once I actually started listing things out-I was less likely to purchase silly unneeded things.

  6. Christina @ Food.Fun.Fabulous. Says:

    your post yesterday actually inspired me to visit mint.com. I’d heard good things about it and it looks at your budget just like you’ve listed here!

    • Holly Says:

      We recently started using mint.com — I haven’t looked at it enough to really know what to do with it though.

      I’m glad you like it!

  7. Shanna, like Banana Says:

    This is so fantastic that you are taking charge like this! It’s really great!

    I’m shocked that your morgage is 1200! Our *rent* is 2600/mo. Blah!

  8. IHeartVegetables Says:

    I’ve recently been taking a closer look at my monthly spending and I’m finding out so many ways I can save money! When I’m really paying attention, it makes a huge difference! I’m literally cutting $200 from my grocery budget, and so far, I’m right on track. $200!!! And that’s just excess money I was spending on food!

  9. the neurotic yogini Says:

    I have never made a budget before.. But I am SO excited you posted this! Makes things look so simple and not overwhelming (as I currently felt)! Thank you, thank you, thank you.

    I mentioned you in my post yesterday.. 😉 You’ve inspired me to get my finances in order and becoming debt free (in the relatively near furture)!!!

  10. the neurotic yogini Says:

    Become.. not becoming.. 😉

  11. Beth Says:

    Awesome post Holly! Setting up a budget was huge for me in the beginning to make sure I didn’t miss payments on knew when things were coming out of my account so there were no surprises. Now, it’s been instrumental in taking care of some debt.

    I even have a line at the bottom that totals my debt and then takes out what I have in savings from there, so I see my net worth. That’s helped me a lot to make better financial decisions!

  12. Matt Says:

    Do you ever use Mint.com?

    I use it daily and I love it.

    • Holly Says:

      Yes we recently “discovered” mint.com and love it as well — I like that it gives you a snapshot of where you are financially!

  13. Laury @thefitnessdish Says:

    Another great post! I am doing taxes now so all my bank statements are printed and we were just looking over how much we spent on things. I am still bad with budgeting, but need to get on the ball with the baby coming!

  14. Heather @ Get Healthy With Heather Says:

    You explained the snow ball perfectly! I read Dave Ramsey’s book years ago and couldn’t get my husband on board right away. Now we’re both on the same page and moving towards paying off debt more quickly!

    I know I still need to do better at sticking to budgets. I can’t even seem to meet my $400 monthly food budget (including toiletries too) though 😦

    • Holly Says:

      We have ours set close to $400 as well — we seem to be on track and then we run out of stuff like paper towels, toilet paper and deodorant and then we have to scramble a bit 😦 Toiletries are expensive!

      Jason and I each read the book years ago and kept saying “we should do this” and it finally clicked another year or so after that.

  15. Jo Says:

    Budgeting in a nutshell. Great post, Holly!

  16. Sarena (The Non Dairy Queen) Says:

    Great post Holly! Being self employed kind of stinks though. No matter how much we budget, if they don’t pay, we can’t pay. I want to get to a place where our out out going is way less.

  17. Jess Says:

    I have a checking+savings as well–love it that way!!

  18. Toni Says:

    I just love this series! So useful! Thanks again for sharing!

  19. Averie (LoveVeggiesAndYoga) Says:

    budgeting is hard work

    paying off debt AND saving money…both require hard work, sacrifice, and planfullness. Going out for a $4 coffee b.c you’re too “busy” to brew at home..no. It’s small things like that that REALLY add up and so getting out of debt AND getting some savings…requires…work!

    You and i know that! Great job Holly 🙂

  20. Kristina Says:

    My fiancee and I are very lucky in that neither of us have any credit card debt and we were both able to pay for school through scholarships and helpful family members… but I was wondering if you have any tips for increasing your credit rating? Aside from paying my bills on time, I’m not really sure what else I should be doing but my credit rating is on the low side of average (I’m guessing because I rarely use credit at all)… I’m just worried this will bite me in the a** when I want to buy a car or house. Any ideas?

  21. Laury @thefitnessdish Says:

    You’re such a financial rock star this week, Holly 🙂

    We have term life insurance. I forget why but it seems like the way to go!

    • Holly Says:

      Yeah I don’t know much about insurance at all — but Jason and our insurance guy seemed to be on the same page and at the time I understood it 🙂

  22. Christin@purplebirdblog Says:

    I love that you are expanding on all of this information… it’s extremely helpful!

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