It’s the end of the month, and that means it’s… drumroll please… budget time! I realize it may seem a little strange to get excited about budgeting, but who cares, it’s great! I create a new budget every month and it is the most important tool I have to reach the light at the end of this debt-filled tunnel.
I started budgeting at the beginning of this year and it has changed EVERYTHING. Before the budget, I had always kept a list of my expenses and made sure I was paying on time each month, but I hadn’t ever written out a plan for the rest of my income. I just paid for things as they came up and I tried to save a little each month. If a large expense came up, I relied on my credit cards. If I had any extra money at the end of the month, I would often treat myself with an Amazon binge or new clothes. What I didn’t realize was that this method was basically the equivalent of a financial hamster wheel, and I wasn’t getting anywhere.
Debt has always been a part of my adult life. Making huge monthly payments to creditors and living paycheck to paycheck had become normal. I have never known anything else. When I stopped to think about how it would feel to completely eliminate these payments – to owe nothing to anyone – it kind of blew my mind. I totaled my monthly payments and imagined what it would be like for somebody to just drop that amount of cash in my lap every month. That, my friends, is a game changer.
In order to reach that goal of becoming debt free, I started my budget. The budget allows me to tell my money exactly what to do, instead of looking up at the end of the month and wondering where it went. Until you try it, it is impossible to imagine how beneficial this can be. You’ll gain control of your finances, make fast progress and feel like you have a lot more money each month,
Here are the steps to my budgeting strategy for getting out of debt:
Step 1: Save up $1,000. This is a classic emergency fund, right out of the Dave Ramsey playbook. These funds should be kept in a separate savings account and you should never touch them unless you have an unforeseen emergency. If you do ever spend from the emergency fund, you must replenish it as soon as possible as your first priority. $1,000 is not a lot of money, and that is the point. The discomfort of having such limited savings will motivate you to work faster to get this over with! If you already have savings, set aside the $1,000 and put the rest toward your debt.
Step 2: Save up one month of expenses. In addition to your emergency fund, save up one month of your total expenses (housing, utilities, minimum debt payments, food, entertainment, everything) plus a small buffer of $100-$200. This might take a little while, but it’s worth it. After you have saved up the money, wait until the end of the month. The funds you have saved will be used for next month’s budget. If you have saved up $2,500, then next month you will spend ONLY $2,500 and your budget will dictate how the funds are spent. As you earn income next month, those funds will be saved up (not spent) and will be used for the following month’s budget. This way, you are always one month ahead and you know exactly how much money you have to work with when you’re making your budget on Day 1. You also don’t have to worry about the timing of pay checks and payment due dates anymore because you’ll always have the money in your account. This is especially helpful for anyone who doesn’t make the same amount of income every month.
Step 3: Give every penny a purpose. This is the fun part where you get to create your budget on, or just before, Day 1 of the month. There are a ton of websites and apps that allow you to do this electronically (Mint, EveryDollar and YNAB to name a few) or you can stick to good old pen and paper. First, you need to know your total income for the month. If you’ve completed Step 2, then you already know exactly how much you have to work with because it’s sitting in your checking account. If you skipped Step 2, you’ll have to use an estimate of how much you expect to make. Next, make a list of every single monthly expense you have, including the minimum payments on your debt, and list the dollar amount for each one. Be realistic. On my first budget, I only gave myself $100 for groceries and ended up eating ramen noodles for the last two weeks. Don’t forget less frequent expenses like oil changes, medical visits, birthday gifts, etc. Every single thing that is happening this month should be in your budget and I mean everything. After each amount is filled out, subtract the total from your income to see what is left over. If your balance is negative, you need to adjust your spending or cut expenses all together. I cut cable, switched my cell phone provider, cancelled memberships and shopped for a better auto insurance premium. If your balance is positive, it all goes toward your debt! You should be focusing on one debt at a time.
Step 4: Start a Few Sinking Funds. A sinking fund is a separate budget line item that is used to save for a future planned expense. For example, let’s say that you know you will need to buy new tires next year and they will cost about $600. You could start a Tire Sinking Fund for this and budget $50 per month for the next 12 months. A few other examples of sinking funds are for Christmas gifts, insurance premiums, medical procedures and car repairs to name a few. You don’t want to have too many sinking funds because it will take away from your goal, but I do think it’s important to plan for larger expenses that you see on the horizon. I have my sinking funds set up as separate savings accounts and I transfer the funds right from my checking account at the beginning of each month.
Step 5: Keep Improving. With each passing month, you’ll learn a little bit more about your own spending habits. You’ll also start to have ideas about how you could cut costs or generate some extra income. It almost becomes a game to see how much debt you can pay off and you’ll always want to do better than last month. In my experience, budgeting your money naturally causes you to spend less. Eventually, you won’t even need to look at the balance in your bank account. You’ll just reference your budget to see how much you have in each category and make spending decisions accordingly. When you make that extra debt payment each month, it will be so satisfying and rewarding. I would strongly encourage you to track your progress with some kind of a visual countdown to debt freedom. Look at it every day and remind yourself that you’re making progress and creating a positive change in your life.