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!