Budgeting:: The Debt Snowball

The other day I heard a statistic from a co-worker that I thought was quite interesting and is what gave me the idea for this series of blog posts.  It goes something like this, “The average American with one credit card is $15,950 in debt”.  The scary thing about that figure is that it may not even include the debt they might have from things like student loans, cars, a mortgage, etc. YIKES!

We are lucky in that we don’t have credit card debt, but we do have some debt.  It's nothing extreme and is what I would consider a “normal” amount of debt for people our age.  However, it's debt and we don't want it.

Yesterday I talked about how our family budgets via the envelope system.  The budgeting we do allows us to use any “extra” money we have to be put down on the debt we owe.  A pretty simple concept if you think about it.  Dave Ramsey calls this concept the “Debt Snowball” and here’s how it works:

1.  List your debts:  List all your debts in order starting with the smallest balance (your mortgage is not included in this).  Don’t be concerned with interest rates unless you have two debts with similar payoffs, in which you would list the higher interest rate debt first. 

2. Attack:  Pay as much as possible to the first debt on your list.  This is where the budgeting sheet I spoke of yesterday comes into play.  The budget sheet will help you realize how much extra money you can put toward your debts.  While paying as much as you can on the first debt, pay only the minimum payments on your other debts. 

3. Repeat:  Once the first debt is paid off, you’ll now have more money to put toward the next debt. Over time, as you continue to payoff creditors, you will direct a larger amount of money toward each remaining debt.  This is point where the whole process really starts to move and you start seeing your debt decrease quickly. 

So then what do you do once you've paid off all your debts?   Here are the steps we plan to follow (Dave Ramsey’s “Baby Steps”). 

1. $1,000 saved as Emergency Funds (Our personal opinion was to save more than $1,000 for an emergency, but others may disagree.  Either way, have something set aside just in case).

2.  Pay off all debt with the debt snowball {we are currently finishing up this step now!}

3. Save three to six months expenses in savings

4.  Invest 15% of income into Roth IRAs and a retirement plan.

5.  Save for College Funding

6. Pay off your home early

7. Build wealth and give

That’s the plan in a nutshell, we know it’s going to take awhile to get to step number 7, but we can’t wait until we’re there!  

With that, I think I hear the olympics, a cozy blanket and THESE delicious treats calling my name! See ya!

Budgeting:: The Envelope System

It’s an exciting month in our household!  Why?  Because this month we will be paying off one of my student loans…much earlier than planned!  Wheeeeee!  I could not be more excited to get rid of it!

In the next couple of posts I plan to do a money theme, the first one starting with how we as a family do our budget.  I think every family struggles with this to some extent so I thought it this post might relate to a lot of people.

Ryan is very good with money.  I honestly think he could live off of $2 a day if he had to, and I only wish I could say the same for me.  Maybe it has something to do with being a girl, but it’s just not possible for me.  Before we started budgeting I never went spending crazy, and I always made sure to talk to Ryan before buying something expensive, but I definitely wasn't watching what I was spending!

This summer, when we decide to put our house up for sale, we agreed that budgeting needed to be one of our top priorities.  Needless to say for Ryan this was no big deal, however, I was less than thrilled.  After he showed me the math that illustrates just how much money we COULD be saving per year if we didn't have any debt, I was 100% on board.  It was crazy! 

Since October we've kicked our budgeting plan into high gear and in just four months we've already paid off one piece of debt, so exciting! 

One of the best budgeting tools we've found {and others we've talked to agree} comes from Dave Ramsey's Financial Peace University Class.  In this class he talks a lot about the “Envelope System”.  Now, I should probably note that Ryan and I have not taken Dave’s class, but we've done the research to know what the Envelope System is all about.  Unfortunately, because everyone’s finances differ, there are no step by step directions for how to do it, but here’s the system we’re using in a nutshell:

1. All cash:  Get on board with the concept of cash only.  We only use our debit card once a month to pay our bills, everything else is cash.  We even went as far as to cut up one of our extra credit cards {Dave would tell you to cut them all up, but we disagree and keep one on hand for emergencies}.

2.  Make a realistic budget.  We use an Excel spreadsheet to lay out all of our monthly 'bills' and their individual totals in one column.  This column only includes things we are billed for each month like our mortgage, student loans, electricity, cable, cell phones, etc.  We then dedicate a second column to our monthly 'expenses' like daycare, haircuts, groceries, gas, things we aren't necessarily billed for each month, but do pay for on a regular basis.  Don't forget those things you pay once a year like car registration and be sure to break it down monthly to make sure you save enough.  This gives us a good overview of just how much we spend each month, which is critical in making this system work.

3. Divide and conquer:  We then dedicated envelopes for each of the monthly “expenses” (column two on the spreadsheet).  For this, you can have as many envelopes as you need.  We’re pretty strict so we've created an envelope for almost every possible expense we can think of…even the dog has two {ha!}.

4.  Fill ‘em up:  On pay day{s}, head to the bank and get your cash...you’ll get to know your bankers quite well.   Side note:  It helps to know exactly what denominations you need your cash in.  After you've categorized each envelope, fill them up with the money you've allotted for in your spreadsheet.  For example, if you've allotted for $75 per month in clothing, put $75 cash in the envelope.  It’s important to note here that it may take a few months to get the allotted amounts for each envelope right.  You may find the first few times you do it that you've either over or under budgeted for a certain expense, but that’s ok. Make a note of it and see if you can correct it the following month.  Eventually, you’ll get it right!

5.  When it’s gone it’s gone: Warning...this is the hard part!  Once you've spent all the money in a given envelope, too bad so sad, you’re done spending for that category. If you go on a shopping spree and spend everything in your clothing envelope {guilty}, you can’t spend any more on clothes until you budget for that category again next month.

6. Don’t be tempted: Leave your debit card at home.  I've found there is seriously something psychological about spending cash, it hurts more, I swear! Haha!

That’s it! Again, each family is different, so this may not work for everyone, but it seems to be working for us!

My next post will be about another budgeting tool we use, Dave Ramsey's “Debt Snowball”...so stay tuned!

Shared with: Treat 'Yo Self Thursday