Every financial expert these days is touting “live within your means.” Most aren’t clear on how to do that in detail other than to say, “cut luxuries and spend less.”
All the “poor and hurting” families shown on the TV programs make $60k and up, but most Americans don’t. To those struggling to live on $25k or less with a family, it comes across as insulting to hear a financial expert jump for joy at saving $400 a week by eating out less. Most families don’t have $400 a month for groceries.
Living within your means is an attainable goal with determination and effort. Working at it is the key. I developed this budget after a nasty divorce left me destitute and in crushing debt. I now have only 3 debts left, one of which is my house that I will be paying off within two years.
Gather a notebook, highlighters, pen and pencil, pay stubs and all of your bills and debts.
This budget does take time to set up and diligence to make it work.
1. In the notebook, list all the take home pay you make. For couples, list both incomes. If the pay is bi-monthly, make a list labeled “week 1” and “week 2” or pay one and two, whatever is memorable. If the pay is weekly, list four columns. You can also use a computer spreadsheet.
2. Make a separate list of all the bills and debts. Here is where honesty is essential. If you owe $5 to a co-worker, list it. Label the first column as Name (this is the name of the debt/bill), label a second column as Payment (if a monthly payment is due or if a total payment like a utility payment is due), and label a third column titled Due date. For those “personal debts,” (those owed to individuals), list the due date as “now.” You can add a forth column labeled total due (as in credit cards or loans) and enter the total due in pencil. This amount will change from month to month. As the amount changes, pencil in the new lower amount. If the amount is “growing,” increase the minimum, payment made until this starts to lower every month. (I would decide at this point to close that account and make it the first debt to be paid off.)
3. Take a break at this point for 15 to 20 minutes. For some, seeing the size of the list and the amounts due can be a shock, for others, depressing. Relax. This didn’t happen overnight and it won’t be solved overnight. Don’t beat yourself up about it; pat yourself on the back instead because you’re DOING something about it.
4. For this exercise, I’m going to use the 15th of the month for “Week 1” and the 30th of the month for “Week 2.” Now look at the list of bills and debts with the due dates. Do not do any adding or subtracting yet. On a separate piece of paper, make a list of all the bills, which are due from the first through the 15th. In a second column, list all the bills with due dates from the 15th to the 30th. For those with dates listed as “now,” divide them between the two columns. Now add the totals in both columns.
5. Don’t worry, you’re on the right track. Go back to the list with “Week 1” and mark spaces for each bill to be subtracted from the pay amount. Enter the amounts due from the 15th to the 30th in this column. (If you enter the first of the month bills which are due on the first, you’ll be paying late and incur fees). If you’re going into the red, don’t worry about that right now. Do the same thing in column “Week 2.” Be sure to include an amount for groceries, pet food and necessities (I list them all under groceries on my budget.)
6. Seriously, take another break. Give yourself anywhere from 30 minutes to the next day. Don’t look at the spreadsheet or the papers. Do something else. Breathe.
7. Ok. If column “Week 1” is in the red at the end, and “Week 2” isn’t, try moving items from one column to the other. For payments on loans and credit cards (and other interest bearing debts), list minimum payments first. If the kids are getting an allowance, this needs to be listed too.
8. If both columns are still in the red, then decisions have to be made. Take your highlighters to the list of bills and debts. (If you don’t have highlighters, identify the following with different codes). Mark all bills (those are services and goods used on a continual basis- i.e., land line phone, gas, electric, water, car insurance, health insurance, etc.), with the yellow highlighter or a “B” next to them.
9. A debt is a specific amount of money owed for something, credit card, loan, with or without interest. Mark these in red or with the letter “D.” Mark the rent or mortgage with the green highlighter or the letter “H” for housing. The car payment is a debt. The good thing about a debt is that it has an end date. When the amount “$0.00” is reached, you owe nothing else.
10. When finished, look at the list you just marked and make another list. Yes, another list. It helps to see through the forest. The first column will be marked “Necessity” and the second will be marked “Luxury.” Housing, utilities, groceries go in the first, while credit cards, cell phones, allowances, etc. go in the second. This is the first column where cuts will be made.
11. Time for another break. You’ve earned it. I know, this is hard work. When you return, start cutting. Eat out once a month, cancel the cable and watch online movies free, watch DVD’s you already own or share with friends, etc. Eliminate the texting on the cell phones and save money, (one way to stop the texting is to get rid of the cell phones.) Find less expensive car/health insurance- do your research first. Stop using any credit card to pay for anything- realize it’s a high interest short-term loan (imagine it like a financial vampire sucking all the money out of your financial life with the interest and fees).
12. Go online, ask friends, do research to find ways to do the things you love and pay less. Go to free events in the community and ride the bus to save gas. Take a vacation at home. Instead of texting, visit your friends and see each other face to face. Invite friends to dinner at home instead of eating out. Learn to save money at the grocery store. Brown bag your lunch at work/school.
13. If the car payment is too much, consider selling and getting a less expensive car or riding the bus to work. Doing both will save money. Image is nothing if you’re broke and facing a repossession- that will trash your image and your credit rating. If the mortgage or rent is too high, (this column should be a last resort after everything else is cut), consider moving to something less expensive. Houses will be for sale in the future, and giving up a house to save your credit rating will help you in the future. Don’t be too discouraged about it- getting out from under a “white elephant” will allow you to get a dream home later and you’re budget will be able to handle it.
14. As the amount of money left over from both columns grows, and it will, don’t spend it immediately. Set up a savings account and begin to save. (I began with $5 each pay week.) Resolve to reach a certain amount of savings a month, say $50/month. Take any extra and add it to the credit card or debt with the least amount owed on it. Keep adding that extra until the card is paid off- then add that amount (payment and the extra) to the next highest debt until they’re all paid off. It does work. It just takes time, effort and determination.
15. When you spend time researching on ways to cut costs, you’ll find items that will fit into your budget. If there is even a few dollars left over in both columns, now you know where you stand. Resolve to pay off the debts and have money to save. Leave credit cards where they belong- at the credit card company. You’ve joined the new “Joneses” who are getting out of debt. When you pay off that first card, reward yourself and brag at work. You’ll feel great! I did. When they’re all gone, DANCE! People will ask how you did it. Show them how. Manage your money, don’t let your money (creditors) manage you.
Some extra points to consider:
• Teens 16 and older can get a part time job to earn their own money instead of receiving an allowance.
• If children are irritated at losing luxuries like cell phones, pagers, electronic toys, etc. let them see the family budget and show them where the money’s going.
• If another job is needed for the money to cover the existing debts and bills, only one parent should do it at first. Cut all luxuries before taking this step. Use the extra money for the budget only.
• Don’t lie to yourself about how much you owe or how much you make. The budget works only if you’re honest with yourself.
• Don’t get discouraged- it takes time to get out of the financial hole.
• Don’t dodge credit collectors- talk to them and negotiate a payment you can afford (do the budget first). Remember they are paid a commission on what they collect, so they will hammer you for more money.
• Don’t be afraid of collection agencies- you owe the debt to the company (for example, a hospital) so pay the company directly. If the debt collector is rude or nasty, fire off a letter of complaint to both the company and the collector’s company. It’s illegal for them to be nasty, and the company is responsible for the actions of the people they hire. Learn the collection laws of your state and you’ll be better equipped to handle them and take action against them if needed.
• Don’t take a “quickie payday loan.” These are super high interest short term loans, worse than credit cards. Think of them as legal loan sharks. I looked closely at an online “lender” for $900. The first payment would have been over $700 and the interest was listed on the site at 685%.
It does take time to get out of debt. This isn’t a “get-rich-quick” or “get-out-of-debt-overnight” scheme.
Being debt-free is the new financial black. Let’s all join that group.