We’re down to our last month of living above our means. With our upcoming move, we are taking the opportunity to get right with our finances and shed our poor financial decision-making. We are very lucky to be able to drastically minimize our basic needs overhead (we’re moving in with family temporarily) so that we can get out of debt and build a sane future. The years of mismanagement will be behind us and we’re starting anew. The enormous stress and cycle of dependence has finally broken our backs. I’d say we’ve just about hit bottom and are finally serious about swimming back up out of the muck.
For the first time ever, I’m putting effort into creating a budget makes sense and that we can actually stick to. Previous efforts just weren’t realistic and we never really changed attitudes, so success never happened and we didn’t get the benefits of the budget. This time, however, we are going into intense financial counseling and working on changing the attitudes.
So, I decided to start making some notes on what I think a sound budget looks like. Though our housing costs are not really a factor for at least the first few months, I want to get used to the budget that we’re going to be developing. I’ve started out by breaking it down to percentages, without focusing on the amount of our income (which is unknown) and with an eye toward accepting only realistically manageable expenses for housing down the line. Here’s what I have so far:
[ul]
[li]10% (minimum) - Direct to savings[/li][li]30% (maximum) - Housing costs (including rent/mortgage, utilities, insurance, maintenance)[/li][li]30% - Debt repayment, until we are debt-free; payment on new debts (other than housing) down the road will account for up to 15%[/li][li]15% (maximum) - Food/dining out (based on $450 groceries on $3k monthly income sounds reasonable)[/li][li]15% - Everything else (including entertainment, clothing, gifts, etc. This is where we decide whether we can afford to go see a movie or get a club membership)[/li][/ul]
In the beginning, I think it will be easier because we can choose to take the housing costs that are going to be much less than 30%, divide it up and supplement savings and debt repayment to get eliminate the debts sooner and get a better cushion. But I think it’s a fair percentage to plan for when it does become a necessity. The 15% miscellaneous expenditure is going to be the most challenging, but I think that’s really where we need to buckle down to learn not to spend more than our means.
I understand that exact amounts will fluctuate with earnings (and can even adjust percentages based on how frugally we can and want to live), but I want to know that I’m spending within reason and still can meet our obligations.
What do you think of this and how does your budget look?
My budget look grim by those numbers. I pay child support and student loans while living in an expensive area so my kids can go to a decent school. I pay well over 50% of my take home for rent and utilities.
The motorcycle is not just for fun, at 50mpg it saves my life every time I fill it up. (13-14 bucks as opposed to 60 for the wagon)
I should note that for the time being, I haven’t included any plan for investments because the eliminating the debts, establishing a nest egg, and learning to live within our means are my priorities.
Eventually, I hope to use a well-funded nest egg for investment and enlarging the nest egg.
I know what you mean. I will finally be getting out from under the child support thumb (though we still have a younger one in the house) and we have had a very hard time reducing housing costs, though we live in a transitional neighborhood. I think the key that we missed was we were living above our income and one of the reasons was that we wanted to live in a nice neighborhood for the schools, but when our income bottomed out, we couldn’t/didn’t quickly reduce that expense which snowballed quickly. At this point, about all we can do is pay partials on rent and utilities. Putting money in savings is a pipedream at this point with all the must-pay bills that can’t be met. But it is the best advice I’ve seen so far: Pay yourself first.
The motorcycle is a great idea in this economy and eventually when we can afford it, we’re looking into adding a moped or motorcycle to our single vehicle household. But right now, we have a paid off used minivan in good working condition and we’re just going to keep up the maintenance on that and hope for the best as we reduce our extraneous trips.
Make sure if you have 401K plans that you contribute the max to them, especially if there’s matching. That money is tax-deferred and it comes out before you see it, so you never have the chance to spend it. Even if you need to use it in the case of an emergency later, and have to pay taxes and penalties, the amount you pay is less than (in my case) the matching. My company will match the first 3% dollar for dollar. The next 2% at $.50 per dollar. So for every $5 I put in, they put in $4 - Free money!
put the direct-to-savings in a different bank than you regularly use. It’s too easy with internet banking to shuffle money around when you just have to have something. If it’s in a different bank, and you don’t keep a debit card for it, you actually have to go to the bank and withdraw the funds. You’re less likely to blow it that way. In fact, don’t use debit cards at all, if you can help it. If you put your cash in envelopes designated for each fund, you can see exactly how much you have left in your entertainment fund, or your food budget. (“No eating out this week - we dont’ have the money for it”)
Is your 30% for housing, utilities, (including cable and internet, I’d assume), insurance and taxes really going to work in your area? That’s $900. If your mortgage will be $700, that doesn’t leave much for everything else. Of course, you may get more mileage out of that depending on your local housing costs.
What new debt to you anticipate after you pay off the debts you have? You’ve budgetted 15% ($450), but if you’re wise you won’t incur new debt after you pay off what you have now. Do you really need a car payment? And is a 6 year old used car a better idea than a new car (with high payments and interest and full-coverage insurance)?
Good luck to you. It’s a horrible feeling being out of control of your finances.
You are indeed lucky to be able to cut your outgo down a lot.
Quite a few of my friends are following the Dave Ramsey plan, in which you get current on your payments, build a $1000 emergency fund, and only then start paying off debt. The emergency fund helps you avoid borrowing more when small emergencies happen.
After that, you pay off debt, and once the debt is gone (except for house mortgage), you build up 3 months savings. Only when your savings are in place does he have you looking at ‘permanent’ percentages, such as 10% to charity or whatever.
Before then, it’s more a case of ‘use whatever you can spare to pay off debt, before you save more than the emergency fund’. I think the idea is that the interest charges on the debt more than eat up whatever you may be making on the savings, so it’s less expensive to pay off debt than save with an intent to multiply money through investments (as opposed to just setting money aside).
Even when we were living above our means while I was employed I always contributed the minimum required to be eligible matching employer contributions. As I’m currently unemployed, my 401(k) is not seeing any contributions, and is losing badly since I neglected to manage it. I need to get on that and move the investments into something a lot more stable until I can start contributing again and play with it.
You are right about that. We currently have a credit union account that we can maintain even after we move out of the area which I can manage online if needed. I’ve decided that we’ll maintain it with our off-limits savings for the time being. I’m considering opening an ING or Emigrant account for our day-to-day usage, which will make it easier to transfer savings to the out-of-sight, out-of-mind credit union account. I’m planning to cut up our CU debit cards once we’ve established the new account.
I’m hesitant to switch to an envelope system because I don’t feel comfortable carrying large quantities of cash and continuing to use our debit card forces us to actually account for the spending, which I think is better in the long run for developing a more involved relationship with our finances. It means seeing the expenditure more than once and gives us the added protection of not having money go spent but not accounted for. Those unaccounted for expenditures have killed our budgets in the past.
Yeah, this is the hard part. Housing, is expensive, even moderate housing. I’m not sure how to reconcile this problem, other than accept less than what we want until we can afford it. That may mean cramming our PCs into the dining room or bedroom instead of having an extra room for them. At this point, we have and can live without cable and land phone service, internet service is less expensive if you are willing to live with less bandwidth and reliability, but gas and electric are getting pretty steep even when you try to save. My goal is setting an upper limit and deciding which portion we can or have to scrimp on to keep a roof over our heads. But other than rent, gas and electric, all the other things you can live with less or none if necessary. You want more, you earn more.
Right now and for the last few years, we decided we didn’t need a car payment because we have other obligations we can’t meet. So, a used, paid for in cash vehicle is better than nothing. But only having one vehicle is very inconvenient and public transportation expenses do nothing to rebuild our credit, which is important to do once we’ve eliminated our debt. My goal to do rebuild our credit is to commit to debts that are practical and useful (i.e., second car vs. vacation or big screen TV). A second vehicle should reduce our fuel consumption because it will get much better mileage, leaving the minivan for extended trips or family trips and reducing the wear and tear of that vehicle, while providing a chance to rebuild our credit and represents an asset once paid off.
That’s the plan we’ve been looking at. My in-laws are already taking the Financial Peace University classes and have the books, so we’ll probably work with them. There are a few things that I’m not fond of, like the envelope system, but it is a sound plan and I’ve adapted the more common elements into my own ideas. The emergency fund being one of those steps. I believe 90 days is the maximum you should take to establish the fund ($333/mo), which is where I got the 10% per month on what should be a reasonable income to expect. If we are fortunate enough to earn more than we can pay off the debts sooner and then raise our savings contributions to establish the 3-month fund faster and/or meet shortfalls in other areas as they arise.
I like this too, and I’ve bookmarked it for future reference. Maybe I’ll put two different budgets on paper and see which seems more doable. I realize, though, that a budget has to be a living, breathing document that takes reality into account, so I’m not opposed to making adjustments down the line. I do want a budget that is reasonable, workable and fiscally responsible, whatever shape it may take.
Why is it important to have a good credit rating? Really?
I’m trying to see whether I can live a life totally without borrowing. This was forced on me involuntarily, true, but now I’ve adapted. The only two things I can think of that I’d need credit for are a) a credit card to rent a car; and b) a mortgage. I’m saving a security deposit to get a secured credit card so that I can do a).
And b)? Well, according to the mortgage calculator at ING Direct, at a modest payment of $900 per month (a little over a quarter of my take home each month), and contributing the $20,000 down payment I can borrow from my RRSP, I can afford to borrow… around $150,000. That doesn’t even get you a walk-in closet on the 47th floor in Toronto these days. I’m priced out of the Toronto market, and I make more than the Canadian median wage! I guess I’ll just continue living in my little apartment and paying rent.
Well, precisely what you mentioned is why it’s important to have a good credit rating, among other reasons.
I’m not worried about the car rental issue anymore. You can do that on a debit card for the most part these days. But if I ever decided to take a car loan or even lease a car, I’d save a lot more money in interest with a higher credit score and it would put me in a better position to a more aggressive loan payback with lower interest rates. If I can fit a higher auto payment into the budget (i.e., 15% debt load), then I could take better advantage of lower interest rates, while still earning interest in an interest-bearing account that would protect that debt. It’s about having more options.
Additionally, at some point I may want to own a house. Making a house payment affordable depends a lot on the interest rate you’re paying. Just as the auto loans, interest is high for people with low credit scores. The less interest we have to pay, the more house we’re going to get for our budget.
Living is cheaper with a high credit score. There are plenty of ways to save money and earn money on the money you do spend when you have decent credit.
Other than that, there are quite a few employers that are performing credit checks for new hires and promotions. I don’t agree with it at all and I wish the government would outlaw it, but I never want to be turned down for a job or promotion that I really want and is a step up because of a poor credit rating.
Another used, bought with cash vehicle would likely end up costing less in the long run as well. There’s no reason that you can’t buy a used fuel-efficient vehicle, for example.
Do you have kids? What’s up with the 15% “everything else”…?
When you’re trying to save money, 15% of your income on non-essentials seems like a heck of a lot. But I ask about the kids because kids are more expensive than adults.
I’ve been busting my ass saving money and I spend about 15% a month total on gas, groceries, going out to eat and entertainment (and previously cigarettes too).
If you guys have a $5000/mo combined income, that’s $750/mo on non-essentials. If you trimmed that down to 5%/mo you could pay your debt down a lot quicker.
Just my opinion, tho. I’m a single person who leads the World’s Most Boring Life, so saving money for me might be easier than others.
I’ve never owned a car, though. My understanding is that my auto insurance rates are far more determined by my experience and history of ownership, which is “not recently and not much”, and apparently puts me in the Most Expensive category next to the louts who crash their “arrest-me”-red Mustangs on the 401. I can actually afford a car; I can’t afford the insurance. The impact of my credit score is minor by comparison.
Re: debit cards… In Canada, debit cards are on a completely-separate system and do not bear MC or Visa marks. Only with the introduction of prepaid MasterCards and Visa cards by alternative vendors (MoneyMart; the CAA) have I been able to get a MasterCard at all. But it’s still not a credit card.
Yeah, we have two, one just about 18 and won’t be coming with us. Do I think that gets us off the hook? Well, I’m not counting on it, but for the immediate time being, to a certain extent it does.
The 15% everything else is not just non-essential items, but most of it is somewhat discretionary. This will include not just entertainment, but clothes, extracurricular school fees, memberships (i.e., YMCA, SDMB, etc), books, cell service, household items, child care, etc. It’s meant to be the most flexible of the expenditure groups, but shouldn’t be more than 15% of our income. It can be smaller if we decide to do without certain things in order to funnel income elsewhere, such as housing, savings, or debts.
Granted, I haven’t had the chance yet to really crunch the numbers to see if it’s overestimating, but if it’s underestimating there’s definitely a problem. Also, I don’t know what income we’re going to have to work with. It’s quite possible this line gets adjusted.
I think $250 is really pushing it, but it may be possible. Also, since we’re staying with my in-laws, we should be able to reduce housing costs to much less than 30% (my intention is to offer to pay a portion of utilities and reduced rent) since our goal is to get back on our feet and out of debt with savings. That’s pretty much why they are helping us out. They also want us to pay that debt down faster as well, so obviously we’re going to scrimp in other areas to do so and build better habits. So I expect that at least 50% of our income will be going to debt reduction; but whatever it is I’d prefer to get the debt eliminated within six months. I don’t think it’s that bad really, maybe ~ $9-10k.
No, I appreciate your opinion very much. I’m in the pre-planning stages and there’s still a lot of things to iron out. But I really want to be prepared to show my in-laws that I’m committed to this and I’ve given it a lot of thought.
