Wednesday, February 17, 2010
If you are just reading this series for the first time and want to catch up on all the drama click here then just work your way from the bottom up.
In the last part of this series I talked about how we were spending on average 5% more than we earned. That was fun to discover. Okay, so let's recap what we know at this point into our new committment.
1. We were in huge debt :(
2. We were spending more than we were making
3. Dave Ramsey had a step by step plan for us to follow
4. We were really ready to make a change.
So it was time to make a budget. Dave Ramsey tells you to make a new budget at the beginning of each month, because each month can bring with it different expenses then the previous month. For example, our auto insurances are paid four times throughout the years. So this is not an expense we have every month.
Something to take into consideration when you are planning each months budget is how you want to handle large purchases, like Christmas gifts, that family reunion you plan on attending, the new tires for the car you know it will be needing soon (we are actually planning all those in our current budget.)
At this point I'm not going to get into how much you should be spending on Christmas gifts or even if you should make that family reunion, I'll address that later. For now let's just assume you are doing those things and they are reasonable to do given your current financial situation. So how do you budget for these them? Well it takes long term planning and thinking. Being one step ahead of your families needs makes all the difference. Lets address some of these examples individually.
Budgeting for Chirstmas gifts. I've always been pretty good about making a list and a budget at Christmas, and because of this I know fairly well how much money we are going to need. I also budget in wrapping paper and possibly a new decoration or two (although this year I didn't engage in those extras.) Think of every expense you can that will come up during the holidays. Next you have to think about all the birthday gifts you purchase throughout the year. Take your time and don't leave anyone out. Lastly, think of anything else that might come up during the course of a year that you spend money for as gifts. Are you going to be planning a baby or wedding shower? Will you have to buy any graduation gifts this year? What about Valentines Day? Easter? Teachers and birthday party gifts? I think you get my point.
Once you've collected all this information add up the total cost. It also doesn't hurt at this point to keep your data to refer back to when it is time to make a gift purchase. Now, take that total and divide it by twelve months. How much did it come to? This is how much you need to put away in an envelope every months to pay for this category of expenses. Were you shocked by the amount you needed each month? When doing your monthly budget which we will talk further on in a minute, if this amount doesn't allow you to pay off your debt, you need to reconsider how much you are going to be spending on gifts this year.
New tires - or any other major repair /maintenace purchase for your house or automobiles is our next example. Right now we need new tires for our car. I am planning on driving 12 hours to see my parents the first part of April. I would like to have the new tires before we go since I have to drive through the Smokey Mountains. After price shopping several sources, we finally made the decision of where we would purchase them from. The grand total comes to $594 now we just need to budget for them. Once we knew the cost involved we decided to put the money away for them over the course of a three month period. Next month I will have the cash to get new tires on my car.
As I mentioned I'm going to be driving from North Carolina to Missouri to visit my parents soon. Since I've done this before I have a very good idea of my total expenses including gas, dining out, hotel and miscellaneous expenses. We simple budgeted the same way as I just explained previously for the tires. After that trip we will be flying up to Minnesota to visit my husbands family and will do exactly the same to budget for that trip as well.
Since we are working to get out of debt we are not taking any vacations other than to see our respective families one time per year. No fun vacations to the Bahamas or Vegas. This is strictly for family visits only.
Using my examples you can see how your budget will not always be the same each month throughout the year. Also, go easy on yourself in the beginning. It took us a few months of creating a budget before we got good at it. Dave Ramsey also says to sit down with the budget having both spouses agree on it. Very important.
For us, since we were spending 5% over our income on average every month, we needed to find places to cut expenses. I simply went through each category and assessed them.
First thing was the grocery budget. Here is a place I knew I could gain major financial ground. If you remember we were spending on average $1200 a month for three people! Uugh! I knew I could get it down to $600 a month and I did. Then I tried for $500 a month. Did that. Now I'm working at $400 a month and I think I'll make it this month. What did I do? I studied what others were doing. A great source is Coupon Mom. I also started cooking a lot more and from scratch. Now we use a combination of coupon/sales and large discount warehouses such as Sam's Club.
Some things we basically elimated all together. Like what you ask? Like no more dry cleaning, next to no dining out (big one), very little entertainment that wasn't free or close to free. No more housekeeper. No more babysitter and since we don't go out anymore that hasn't been an issue. No more manicures, pedicures or massages. Sigh :(
I also cut some budget categories down to almost nothing. Clothing for example is usually less than $10 a month. I've learned to shop at yard sales and thrift shops. If I do need to purchase some clothing, usually for my son, that I wasn't able to find used, I budget for it that month. Like if I know he is going to need some new shoes or jeans. Before you snub your nose at thrift shop and yard sale finds let me tell you that I am a fashionista in a big way. I swoon for anything Louis Vuitton. I am into designer clothes big time so if I can make this work I know you can. Just yesterday I was in our local thrift shop and saw a Dolce and Gabana shirt for $3.49. Looked brand new just not my size.
So on went the process of putting together a budget. Once we had it together and printed it out all that was left was to follow it. Now, you can do this one of two ways. You can make an envelope for each category and put the cash in at the beginning of the month. When the cash runs out no more spending. This is what Dave Ramsey advises. Or, you can simple write down your expenses directly on the budget you printed off your computer, subtracting left over spending cash from appropriate categories.
We kind of use a combo of both. We have found that on things like utilites, car paymets, etc, it is easier just to write the expense down and subtract it out. For things like vet bills, groceries, big ticket items that we have to save a few months for the envelope system works best. You will figure this out on your own. Again, it takes a few months to get the hang of it so don't get discouraged.
One other thing Dave advises and I recommend, is to list all your expenses, smallest to largest on a piece of paper. I made this in Word on the computer so I could adjust it each month. Then we taped it onto the refrigerator. Nothing makes you think twice about spending extra money then staring at your debt all day everyday. Also, it is out in the open and we discuss it casually with our son. One of the great bonuses of this process is that we are teaching Ethan how to handle money properly and he is getting too see what NOT to do first hand via mom and dad.
Each month then I update the new balances on the debt and use the yellow highlight button in Word to cross out whatever was paid off. Boy are those days fun. Almost as good as (no it is as good as) purchasing a brand new pair of heels hot off the Must-Haves list for Spring. It is always a big celebration around our house.
So we made our budget and followed it. By the start of our second month we paid off our first credit card! Yeah!! I did this great little happy dance around the house for that one. That debt represented 6% of our overall debt. Just so you understand how enormous that accomplishent was it was the equivalent of several thousand dollars. We had gone from spending 5% over our income each month to paying off 6% of our debt. We felt fantastic and for the first time in a long time in control of our future and finances.
Next week I'll talk about how the next several months went as well as explain Baby Steps One and Two according to Dave. I'll also address replys I hear often from people who think this can't be done or how it is simply too strict or my favorite one, " I want to have a life." Of course I highly recommend you refer to Dave Ramsey for details. He also has some budgeting tools on his website if you need them. Until then...
Click here to go on to "Get Out of Debt - Part 5."
Have an amazing Day! Jamie