The holidays are over and the new year will begin. Is your resolution money-related? If so, you are not alone. Budgeting and getting healthy are the top resolutions for New Years. Perhaps it was your goal last year and even the year before and you never got ahead as planned. Things happen such as emergencies, car problems, medical occurrences and that can quickly derail any budget plan. My husband and I became debt free this year and have stayed that way. The trick-set small, rolling goals and never expect to be debt-free in a hurry if you are just starting a budget plan. The expectations have to be real and they have to fit your budget. No two families can budget the same. Here is how we did it and perhaps you can take what fits your own finance situation and gain a little more each year. It took us 10 years and worth every sacrifice along the way.
The first step is to have a plan and place for every dollar coming in. Forget about all the debt and to where for a moment. Grab a paper and list all money in this year. ‘Money in’ examples are
- Available cash-stock cash out allowances, 401K (don’t get scared-hold tight on this one)
- Gifts expected
- Yard sales/Craigslist earnings
- Any other money in for any reason at all
On a separate page, list all expenses into 2 columns. Column 1 is fixed expenses which would be mortgage, utilities and other expenses that can not roll into other accounts or merge. Column 2 is flexible expenses that can be combined or rolled into other accounts such as credit cards, car loans, student loans, etc.. such as
- Loans-cash, student, auto
- Credit Cards
- Any other expenses you have
Rent is rent and gas money is gas money, but some of your expenses can be condensed. Start by calling your cable/internet and insurance company. You should do this at least twice a year. One phone call that starts off with “I need to see how I can lower my bill, I have been shopping around and want to see what my options are with you….” will almost always save you money. Now you are starting out already with lower monthly bills. I have saved as much as $20 a month in adjustments with one phone call to my cable company. That adds up!
If you have more than one credit card or loan, save every credit card offer that comes to you. Do not throw these in recycle! Those can be worth hundreds of dollars to you! Save for a month or two then sit down and choose the best offer to condense-talk to your own bank too for options. The offers you would consider would always be the ones that offer $0 balance transfers, non-payoff penalties and the lowest interest rate. Now you can take your 3 or? higher balance credit cards and loans, transfer the balances (this is why you want a $0 balance transfer fee-do not pay to transfer those balances!) to that one card or line of credit and you have one monthly payment-not multiple! This works for your high interest loans. Transferring a student loan may not be wise as those tend to have very low interest rates and you don’t want to transfer to a higher rate account-transfer wisely! If you owe very little on an account-don’t transfer because you will pay that one off first anyway to get rid of it.
Money In, Money Out
I am a pencil/paper person, so if you are not you will want that spreadsheet up. You need to take the Money In list you created and allocate those to an expense. Here is a sample monthly layout such as I use every month. Think of it as your monthly money forecast
Once you dissect and tweak this, you will know where every bit of money is going and watch loan by loan drop off the list with time. So consider this as you look at the image:
Pay Period 2 has a shorter list because what you owe to rent/mortgage is such a large chunk
I also (did not here as this is a sample) list amounts due next to each
Money In would be uncommon expected money for the month-child support, gifts, selling items, etc… and notice I allocated each to pay extra on the student loan. You can pay extra on most student loans and it takes it off the balance (make sure you chat with your finance or credit card company on how extra (above minimum payment) is allocated so you don’t have penalties for paying off early. Student loans also have one of the lowest interest rates and I would choose the lowest interest loan to get rid of first if amounts owed are pretty equal. Otherwise, get rid of the smaller balances first.
Notice the Slush in each bill cycle? That is your short term savings for extra ‘stuff’ that come up. See the Extra Expenses I list at the bottom? Look where that money comes from. Choose a comfortable amount to transfer over. If you add amount owed and subtract from money in-the left over should be spending and slush money!
You paid off an expense! Happy dance!! Now, get smart! How much is that saving you now a month? $30, $100. That’s a raise, right? All raises need to go towards the next amount you are paying down. Sorry, you are not ready for fancy vacations quite yet- you have a ways to go and that’s being real. Just add in that ‘raise’ and pay extra on a non-penalty account.
401K and Raises
Let me briefly touch on this. Rule-as you start taking care of debt to pay off and you get down to only 1 or 2 monthly debt expenses (credit cards, loans), as you get a raise at work, take half (per-say) and have more distributed into your retirement. When we were paying off debt, my husband would up by 1-2% on a 4% raise towards retirement. We now consistently transfer half (2% on a 4% raise, etc..) The extra is more we now get to enjoy and live off of as a result of our debt-free lifestyle. You were used to living on the money that was coming in-raises pay for your future, not new cars and computers! Not yet!
We have borrowed from stock options available and 401K to pay off debt, BUT and this is a huge BUT…we immediately set up payback from our paychecks.
We owe $16,000 left on our car and we have available to cash out $16,000 from stock options. We cashed out, payed off car, took the extra $400 we now have a month because we have no car payment anymore and have more taken out of the paycheck towards that cash out. Now I take home a few extra still that is a ‘raise’ used towards the next payoff, but I am also buying extra stock or paying my 401K back faster by a couple extra hundred a month. Make sense? Don’t borrow unless on that same transaction, you set your paychecks to contribute right back towards it!
They say NEVER borrow from retirement/stock options, but we have several times and we have it payed back within months and have plenty to be just fine when we hit that age! It takes smarts, discipline and a plan! Sit down with your spouse tonight! This plan will NOT work without communication and trust with the other half!
Hope these help and make sense. Have any questions? Please ask and if I don’t have the answer, I can find it!