I was recently asked by an old friend for advice on budgeting. She had seen my post on another friend’s page suggesting the budgeting tools I liked and asked what advice I would give for someone who wanted to start spending their money more intentionally. So, I’d like you to look at this as me answering that question, as if we were sitting down together over coffee. I’ll give some un-expert, but tried and true advice, and even sprinkle in some of our story.
Goals and Dreams
What is your end-goal? It’s important to personalize this because it’s going to affect the choices you make and how you prioritize different than someone else. Here are some ideas to get you started.
- I want to stop living pay-check to pay-check or juggling bills to stay ahead.
- I want to feel secure that I can retire at age [pick a number–maybe it’s early, maybe it’s traditional]
- I want to stop fighting with my spouse about money.
- I want my kids to go to college and not have as much debt as I did.
- I want the choice to [travel more, give more away, work at a job I love for less pay, become a SAH parent.]
Get a real picture of your debt.
Write down EVERYTHING you owe with total balances, monthly minimums, due dates, and interest rates. This includes mortgage, student loans, vehicle loans, toy loans, credit cards, personal loans, family loans…you get the picture. Log into all those loan sites (and save the passwords somewhere). You will never be able to decide where your money gets to go until you know where it HAS to go. If you want to use paper, that’s fine. If you like technology, I’ve heard good things about undebt.it or readyforzero.com.
OUR STORY: When we first took Financial Peace University, I thought we were in GREAT financial shape. We budgeted, saved for retirement, paid our credit card off every month, and were saving for grad school. It was a reality check to write down that we still had a 30-year mortgage, a vehicle loan and various student loans several years after graduation.
Next, commit to no new debt and getting out of debt.
No car loan. No second mortgage for a remodel. No student loans. No more credit cards if you have any with balances. It’s important to write this down and commit to it as a couple so that the “I NEED a new [car/whatever it is]–we can always finance it.” discussion is off the table.
OUR STORY: We decided there was no reason we should be paying interest on a vehicle loan when we had enough in savings to pay off the truck. We also committed to driving our current vehicles until we could save up cash for the next (used) purchase. We committed to doing everything we could to pay off our student loans within 2 years and that we would have grad school paid off by the time my husband completed his Master’s degree in the next 2 years.
Figure out your income.
Seems easy for people like us who get paid once or twice/month, but really look at every source of income: salaries, bonuses, overtime, side jobs, interest earned, etc. If you have variable pay, write down your income for the past year to get a good idea of where your peaks and valleys are.
OUR STORY: We had steady salaried jobs but wanted to make sure any extra income or bonuses wasn’t frittered away. We pre-committed any extra money to be used for whatever goal/baby step we were on at the time. Made bonuses a lot less exciting, but made our goals possible.
Figure out your expenses.
List your yearly bills (monthly x 12 plus any annual payments like car/life insurance, subscriptions, etc.) and expenses. If you don’t know where to get started, your checking account register online is a good start. It’s recommended to comb through 3-6 months of expenses and start categorizing them. You’ll need a good picture of where you money is actually going before you can make a realistic budget.
Get an emergency fund or buffer.
Dave Ramsey suggests a $1000 emergency fund, YNAB suggests “buffering” one month of expenses (use September’s paycheck to pay October’s bills). The idea is that you don’t want to create new debt/an emergency if an unexpected expense shows up. So, set aside some money from the beginning that is only for emergencies. You might already have that in savings, you might need to pick up extra hours or a side job or sell some things. But you want to do it fast, even if it’s not fun in the short run.
Make a plan: Get that first Budget done.
This is the part where people get scared and think that a budget will be so restricting and they’ll never get to do anything fun. I like the description that “a budget is just a plan”. It’s like a To-Do list for your money. Everything needs to get done, so write it all down, starting with your “needs” and then filling in wants. Be realistic about your expenses at first, based on your past 6 months of spending. Later, if you get to the end of your list and have run out of income to fund each expense category, go back and evaluate what is necessary, what aligns with your goals, and what your current and future priorities are. You might [you will] have to cut something out or down. Here are a few resources to help:
OUR STORY: After YEARS of budgeting, here is a list of my categories. You have to merge/separate what makes sense for you, but sometimes it helps to see someone else’s list to help trigger ideas of things you may forget about.
- Tithe (local church)
- Other Giving (mission trips, local fundraisers, other charities/families in need, Compassion Sponsorship)
- Retirement Savings
- Kids College Funds
- Vehicle Replacement (you should be paying yourself for your next vehicle, not paying someone else for your current vehicle_
- Emergency Fund (if you’re still building it up)
- Monthly Bills (I included here if it’s a recurring bill even if the amount varies slightly)
- Debt Payments, if you have them (Student loans, vehicle, credit card, medical, etc.)
- Mortgage, Insurance, Property Taxes
- Utilities (gas, electric, water, garbage)
- Cell Phone (includes monthly bill + saving for phones every 2 years)
- School Lunch
- Daycare (we have a FLEX account, but this is the extra needed beyond)
- Term Life Insurance (save every month so it’s fully funded when your premium is due)
- Auto Insurance (save some every month so you can pay 6 or 12 months at a time if there is a discount available)
- Yearly Subscriptions (Amazon Prime, YNAB, Zander ID Theft, McAfee). You may have more like NetFlix, Hulu,
- Variable Spending (I tend to take yearly spending/12, but you may want to flex these up and down by month as needed, especially if you’re working on short-term important goals like getting out of debt)
- Groceries/Household supplies
- Clothing/Cosmetics/Hair care
- Home Maintenance (light bulbs, repairs, lawn care, etc.)
- Home Improvement (furniture, decor, photos, appliance replacement)
- Transportation (fuel, maintenance, repairs, registration, tolls/parking)
- Pet (food, vet, boarding for vacations)
- Teaching Expenses (classroom supplies, continuing ed, professional dues)
- Entertainment (dining out, coffee, movies, day trips, tickets)
- Vacation (we include kids rec activities and pool pass, remember to include for things like hotels for weddings and holidays)
- Gifts Given (calculate how much you plan/can spend for birthdays (including party supplies), Christmas (including cards/stamps), Anniversary, Valentine’s Day, weddings, showers, funerals, etc.)
- Others you may need:
- Medical (our premiums and HSA contributions come out pre-tax, but yours may not)
- HOA fees or cleaning/lawn service
- ??? Look at your bank account transactions to see what else you are spending money on so you can PLAN realistically
Your plan needs to include getting rid of that debt ASAP
Whether you use a debt snowball, a debt avalanche, fancy software or just a pen-and-marker thermometer, you need to make a plan on how/when you are going to get all of your debt (except your house) paid off. Quickly. Like 24 months or less. What can you cut out of your budget? Where can you make or commit and extra income? What can you “pause” until it’s paid off (retirement, college savings, new vehicle saving, down payment). Getting out of debt is one of the first keys to freedom.
Well, I think that’s plenty long for a “getting started” post…I told you brevity was not my strong suit. I may elaborate more on the budgeting and debt repayment sections in the future, but there are so many routes you can take and I truly believe you have to do what motivates YOU most, not exactly what I did.
If you have any comments or questions, I’d love to follow up with you!