Do you have your finances under control?

In this post, I will review how you can get your finances under control. This may sound naïve but before I became interested in personal finance I didn’t recognize the amount of money from my paycheck each month that was going toward debt. I kept a simple Excel spreadsheet of our budget, but I rarely checked the spreadsheet versus what we were actually spending.

Below is the debt payment part of our budget, which displays our monthly expenditure to debt payments: $1,650.

Debt Payments: Loan Amount Interest Rate Payment
Car 1                         6,841.00 2.90%                            385.65
Car 2                       12,940.84 4.19%                            364.73
Ford Federal Student Loan                       51,000.00 6.8%                            500.00
MN State Student Loan                       19,900.00 3.20%                            200.00
Katie Student Loan                         6,800.00 6.75%                            200.00
Total                       $97,481.84                          $1,650.38

Yeah… over $97k in debt. One measure I like to use is to understand what my return would be if I were able to invest this money instead of spending it. In this case, what would my return be if I invested $1,650 each month for the next 25 years? The answer is over $1 million (assuming a 6% return each year). That is a LOT of money. In addition, $1,650 is a significant amount of money each month that I am forced to pay, and if I don’t pay this money each month there are many negative implications.

If you’ve read my About Me page, you saw that my wife and I began focusing on our finances in December of 2015 and we are on track to be out of debt (except for our home mortgage) by November of this year! We did inherit a great deal of money that we are extremely fortunate and thankful to receive and we had extra in our savings (beyond what we needed for our emergency fund) that we used right away to accelerate eliminating debt.

After we applied that money to our debt in December of 2015 we were still left with about $45,000. As I write this blog post (July 2016) we are at $18,629 – we’ve come a long way to get our finances under control and we can see the light at the end of the tunnel! Next, I will discuss the steps that we followed to bolster our “get out of debt” plan.

Step 1:  You need to start tracking where ALL of your money goes

This first step really helps to get your finances under control. With so many people using credit cards today, people lose track of where they are spending their money. There are many vehicles you can use to track your spending:  save all of your receipts and manually add up where you spend your money, Mint.com, and Everydollar, to name a couple. I personally use Mint to track all of my expenses because it is relatively simple to use, you can create different budgets, and you can quickly review your spending during the month through their phone app. Once you understand where your money it will be easier to create a plan – and hopefully it will be eye opening for you too, as it was for me.

Step 2: Create a budget and develop a plan to find ways to save money

After you understand where all of your money is going, you want to set up a budget and try to develop categories for your spending. Everybody needs shelter, food, and a mode of transportation; therefore, you definitely need to budget for each of them. Here are the categories I have for my own spending buckets:  home costs, groceries, fuel and car maintenance, eating out, entertainment, education, miscellaneous expenses, and savings. I used to have a car payment category, but I no longer have a car payment J.

You will likely need to massage the different categories that suit you and your situation best – it is okay to experiment. The categories I first developed were much more specific instead of entertainment and miscellaneous expenses. For example, I had a category just for Amazon because it is easy to spend, spend, spend on their website. You need to be extremely disciplined to get your finances under control or you will fail! It is too easy to spend $10 here and another $25 there. Hopefully, you see this when you start tracking your spending more carefully.

Step 3: Build an emergency fund

Before you start to tackle debt, you should build up an emergency fund for unexpected expenses that WILL come up. Most people recommend anywhere from 3-6 months of monthly expenses to safely cover any events that arise. If you can get 6 months into an emergency fund it will provide a nice cushion for any event that life may toss your way. My wife and I had an emergency fund before we really began to focus on crushing debt, but I would first focus on WHERE your money is going (Step 1) and WHERE you can find savings by creating a budget (Step 2) and sticking to it before building an emergency fund.

Step 4: Develop a plan (e.g. Debt Snowball) and apply extra savings toward debt

Now that you understand where your money is going and you have set up your initial budget, you need to develop a game plan to accelerate getting out of debt. This is the hardest but most important step. You will likely, as I did set up your budget to align with your income:  matching your budget so that it consumes your entire paycheck. It takes discipline to find areas in your budget where you can sacrifice a little and throw extra money toward debt.

Katie and I were spending well over $1,500/month on groceries and going out to eat. That is a great deal of money spent each money on food/eating! Obviously eating is important and you need to allocate enough money toward eating healthy, BUT we were able to narrow our budget for groceries to $700 and going out to eat to $500, which freed up $300/month.

Have you heard of the concept: debt snowball? The idea is that you write down all of your debts and their minimum payments. Next, you take the extra money you found during developing your game plan and apply that toward the first debt you want to target. Once you have paid off that first debt, you take that money and apply it to your next debt. You continue this pattern until all of your debts are paid off. I will have a post later this week on how to create your debt snowball tool so that you can set your own target date on when to get out of debt!

Step 5: Begin investing for the future

One area I struggled with was:  should I continue saving while I am working to get out of debt?

During the first four steps, you should save enough into your 401(k) to receive your company match because that is FREE MONEY! If you are making any other contributions into savings, I would use your debt snowball calculator to understand the tradeoffs:  if you take some money you allocate toward savings and apply it to your debt – how quickly can you achieve getting out of debt? I will get into other avenues of investing in more detail on future posts; however, I would consider the following buckets to invest in:

  • 401(k)
  • Roth or Traditional IRAs
  • Permanent life insurance IF it makes sense for your situation

How did you get your finances under control?