I’ve always said I’m not one for setting goals. Probably because I hate the thought that there might be a chance I might not accomplishing that goal. (fear of failure much?)
Well, this year Bil and I set a solid goal for ourselves. It’s one we’ve been working on for a while, but we had never really put a timeline to it. Until now.
By December 2013 we will eliminate all debt other than our mortgage and have at least 2 months worth of salary in savings.
That means no more credit card debt. No more car loan payments. Nothing other than a monthly mortgage payment.
Only a few years ago, we were one of those people who lived paycheck to paycheck. We had to prioritize bills because there never seemed to be enough money to pay them all. And worse, it seemed like we had no money and nothing to show for it. We couldn’t understand it. We had a good income, so what was the problem?
It was scary. And the thought of dealing with our money issues made me feel physically ill.
We finally woke up and realized that continuing to do the same thing month to month was obviously not working for us. Duh.
We had to alter how we spent, budgeted, and just generally thought about money. I’m not going to lie… it was really tough at first. But we can see the results and it is such an amazing feeling.
Our first step was to sit down and figure out exactly what we were spending our money on. So for a few months we simply tracked every single dollar we spent in an Excel spreadsheet. And at the end of those months we looked at where all our money was going.
To say it was an eye opening experience was putting it mildly. It wasn’t the bills or big spending that was the issue. It was the $5 here and there and the bank fees for every transaction that were killing us.
The first big change we made was to create (and attempt to stick to) a budget. The key to a good budget, though, is to make it an achievable budget. Rather than just plucking random numbers out of thin air, we looked at our current spending. How much a month did we spend on groceries. How much was going towards gas. What was the average utilities /phone /gas /cable bill. These became the basis for our budget.
Then we looked at personal spending. YIKES. Yeah, that definitely needed a lot of work. So we budgeted an allowance for each of us. We each got a set amount of money each paycheck to do with what we wanted. If I wanted to go for coffee, it came out of my allowance. If Bil wanted to eat out for lunch instead of bringing his lunch to work, it came out of his allowance. If we wanted to buy something completely frivolous…you guessed it… allowance.
This budget was our first step to clawing our way out of this money pit we were in.
As the months went on, I tweaked the budget so it worked for us. I now do the budget every paycheck, but I also budget a few months out. It allows me to play with numbers and see how if we make a purchase now the ripple effect of spending that money is felt for months afterwards. That’s not to say we never buy anything anymore. We just do it when we can afford it, rather than when we want it, now.
But we realized that just budgeting wasn’t enough. It was still too easy to overspend. You want something? Just take out the magic bank card and get it.
So we now do the envelope system.
Every paycheck we pay all the bills for that pay period online. Then anything that we would normally use our debit card for is budgeted and calculated and that money is taken out in cash. We have an envelope for our grocery money, one for gas, another for the ‘pet’ fund to cover their food/vet/grooming expenses. And we each get our allowances in cash. Once the money is gone, there’s no more spending.
It takes a lot more planning (for example, before you leave the house you have to think ‘do I need to get gas for the car’ and grab the money from the gas envelope if you do). But it also makes you MUCH more conscious of your spending.
When I want to buy something and I can look in my wallet and say ‘oh, I only have $20 left to last me another week,’ I might decide that I don’t really need to buy that item after all.
Any money that we might have left over at the end of the pay period from our grocery or gas money is put in our ‘bonus’ jar. We use that money if we want to order a pizza or go out for dinner. It’s our guilt free splurge money. So we have an extra incentive to watch our spending.
The third thing we changed about how we managed our money was how we paid off our debt. Rather than giving a piece of the pie to everywhere we owed, we started using the ‘Snowball method’.
Simply put, you do minimum payments on everything except your smallest debt. Don’t focus on interest rates. Just look at the total amount owed.
Put the most money you can on the smallest debt and pay it off. Then you can take that money and apply it toward the next smallest debt. Each time you pay off a debt you have more money to pay off the next debt because you have the chunk of money plus the monthly payments you were putting on the previously paid off debt.
Making those 3 changes (budgeting, envelope system, and snowball payments) has taken us from barely getting by to always having money in the bank. It also allowed us to buy all the gifts this past Christmas with cash. No more Christmas debt in January! Woohoo!
The biggest bonus? We never fight about money because money is no longer an issue.
It’s also brought us that much closer to being completely debt free … well, other than our mortgage but that will be the next goal we set.