Part 5 of our Debt-Free Story
So Dave Ramsey lays out these 7 baby steps ($500-1000 in an emergency fund; pay off debt except house; 3-6 months expense in emergency fund; invest15%; college funding; pay off mortgage; build wealth – MORE DETAIL). (We’ve kind of adapted our baby steps/financial plan but that’s a different post.)
Well to get to any of those places there’s one thing that needs to be in place and that is a budget.
Preferably one that works. Our previous attempts had not.
We quickly realized that we were going about it all wrong. We were trying to come up some perfect one-size-fits-all budget in our nice yearly spreadsheet. Sure we accounted for things like Christmas but other than that life was supposed to be the same every month. Right?
Yeah, not so much. When we finally realized that the budget had to be a monthly thing it was like the light bulb went on. Sure, a lot of the expenses stay the same but there are always things to take into consideration.
- Is it back to school time (school supplies, clothes)?
- How many birthdays will you be celebrating that month?
- School pictures?
- Company coming (bigger food budget)?
- Car registration?
The bottom line is this: You MUST tell every penny of your income where to go. Add up your income, list your expenses. If you have extra put it toward your baby emergency fund or your debt. If you don’t have enough? Well, now we’ve got an issue don’t we. (We’ll come back to that.)
I will be the first to tell you that some of our first monthly “budget meetings” were not pretty. Not that they were screaming matches but there was much we disagreed on (why did I need a “misc” category; should golfing come out of his fun money or the general budget). But, we learned to compromise and we knew that if it didn’t work that month we would revisit the issue the next month. And the biggest thing is that we had an agreed upon goal that we were both excited about working toward – paying off our debt.
Dave has some great forms to get you started on his web site.
You might really be struggling to figure out what to put in some of those categories. If you’ve never tracked your spending before you may have no idea what you spend on groceries every month. Take your best guess (maybe look at old debit/credit card transactions) and then save EVERY receipt for the next month to track what you spend.
What if there’s not enough money? If you run out of money before you run out of expenses then there are two things to be done. ONE – cut your spending and TWO – pay the most necessary expenses first (in drastic situations).
The second one is a bit complicated to get into here but I will address the first one briefly. Sometime I’ll do a more detailed post on ways to trim the budget.
There are 3 main areas that seemed to be the first to go to when it comes to trimming the budget (not counting selling cars, etc that have HUGE payments).
1) Eating Out/Entertainment – The average American family spends $225 a month eating out. That’s incredible isn’t it. It adds up quick – a family meal out, some stops at Starbucks, run through the drive thru on the way to/from the kids activities, order a pizza in, lunch for the working spouse(s). One word for you: STOP. Brown bag your lunch, store some frozen pizzas in the freezer, keep a bag of snacks in the car to stave off hunger until you can get home. Budget a modest amount and stick to it. In our strictest budget days we allotted $30 to this category.
2) Groceries – $700. That’s the amount the Jonses (family of four) spend on groceries each month. We knew one couple (w/ no kids) that was spending $900 a month and had no idea that it could be done on so much less. I know families of four who spend $70/wk ($280 a month). I feed our family of six for about $400 a month. I do some coupon clipping but it’s mostly shopping the sales, stocking up when I can and cooking wisely.
3) Cable/Internet/Cell Phones – We’ve come to expect these things. We deserve these things. We need these things. Yes, some are necessary. We need high speed internet at home for our job. Can you downgrade or eliminate your cable package? Can you shop for a new cell plan that’s cheaper? Get rid of your home phone?
Ah, I digress – sorry I get excited about this stuff.
So once we figured out our budget the next problem was figuring out how to stick to it.
Dave Ramsey has a plan for that too. It’s called The Envelope System which I will introduce you to next week.