Welcome back and congratulations on completing your first Debt Free Challenge assignment! I know that it is so hard to actually see your net worth and sometimes, even harder to actually see the total amount of money you owe to your creditors. So, pat yourself on the back for doing this and owning up to the fact that it your debt and you WANT to eliminate it.
Our next step is probably one of the LEAST fun to do — the budget. GROAN! I use to hate having a budget myself – especially when it seemed that when our bills were paid we had NOTHING left for groceries – or to even be able to eat out. However, as my family and I worked ourselves out of debt, we were able to replace the debtors names with FUN names, such as dine out, vacation, movies, and even SAVINGS. When you have a budget, you are taking charge of telling your money where it needs to go rather than it telling you where it wants to go.
PREPARING YOUR BUDGET
This week’s assignment is going to be preparing your Budget & Cash Flow Forms. Don’t worry if you are in the red at the end, we will work through that together. You will want to visit CommunityAmerica Credit Union and download BOTH the Cash Flow and Monthly Budget forms (you can either print out a pdf format or download them to Excel and Word). We’ll start first with how to prepare your cash flow form as you must see where your money currently “flows” before you can see your budget.
PREPARING YOUR CASH FLOW FORM
This is a form that I am sure is new to many of you. Because of that, let’s walk through it’s completion together. Make sure you have your checkbook, debt snowball form and copies of your bills – for the up to the past five pay periods – in order for you to get a true picture of your cash in/out flow. I recommend completing the past 4 as we will use some calculations to reach monthly totals and it can be simpler to do a calculation using this number of pay periods.
Net Income: Fill in your spouse’s and/or your income for each of the last five pay periods in each space listed. You will want to record your take home pay, i.e. the actual amount of your paycheck.
Expenses: This section is pretty self explanatory. Fill in each space, for each pay period, with the amount you spent on each item. If you currently do not have that one (i.e. property taxes), just leave it blank.
In addition, if you pay for items that are not listed, that will go into Miscellaneous Spending. However, it is important that you keep a list of the items and amounts that reach the total of this category, as we will revisit this category later on.
Totals: Total the Icome and Expenses and determine your overage/shortage in the space provided. In addition, total each row across as we will use these for the completion of the next form – The Budget.
PREPARING YOUR BUDGET
Now that you have completed your cash flow form, you can prepare your budget. We will walk through this together line by line, so that you fill it out accurately.
Income Sources: Review your cash flow form INCOME section. Since this form is based upon your monthly income, you will have to possibly complete some calculations to reach that figure. Here are some calculations to help you:
- Paid Bi-Weekly (i.e. every other Friday): Take the first 4 income totals and subtotal them. Divide them by 2 and you will read your average monthly income.
- Paid Monthly: Take the total of all 4 or 5 pay period and divide by 4 or 5 (whichever you totaled) to reach your monthly income. (If the amount listed in each pay period is exactly the same, you can just use the monthly income you see).
- Paid Weekly: Take the total of the first 4 income periods and that will give you an average monthly income.
- Hourly or Commission Based (i.e. fluctuating income): If your income fluctuates greatly from month to month, you will have to revisit your cash flow and budget forms more frequently since your income and expenses can vary from week to week.
Expenses: Total all of the lines from the cash flow associated with your each expense. This helps you see the total of your expenses by category.
Subtotal both the income and expenses and you will see your excess/shortage. In addition, if you happen to be using the Excel form, when you fill in the totals, you will see a chart is created for you so you can see the percentage of your income you are spending on each expense category.
WIPE YOUR TEARS AND LET’S MAKE SOME CHANGES
I’m not joking that when I saw our cash flow and budget for the first time, I cried. I could not believe that we that we had allowed ourselves to get into such bad shape financially. I quickly grabbed a tissue, dried my eyes and did a second version of my forms.
We had to take a long hard look at where we were spending money. Did we really need to eat out? No – we immediately committed to less dining out (once ever 2 weeks)and that immediately gave us more money to apply towards other mandatory expenses.
What you have to do is look long and hard at what you are spending your money on. One thing that you can do to help is to take those expenses and sub-divide them onto another sheet of paper. Make two lists: Mandatory and Discretionary. Go through each item and indicate if it is a mandatory expense or discretionary.
Take a look at your mandatory expenses – like cable. If you get a high end package, you probably should consider scaling back to basic cable – until such time as you elimiate debt and can really afford it. One thing that people don’t think about is your 401(k) plan. Yes, saving for retirement is very important, but, if you are in still in debt when you get there, you will be no further ahead. It is hard to do, but even Dave Ramsey will attest to the fact that you should temporarily suspend all contributions into retirement funds, until such time as you are out of debt.
Then, look at your discretionary spending. Are you paying $50 a month for a yoga class that you go to only now and again? What about your subscription to that magazine that sets you back $100 a year? These are luxuries. They will have to go. If you have debt, you can’t afford anything but what it takes to keep a roof over your head, the lights on and food in your famlies stomachs (so to speak). Trim that budget down to bare bones and you might be surprised to find that extra $100 – $300 or so hiding that you can now start to use towards your debt elimination (or even to help keep the lights on).
Go back in and create a new Cash Flow form once you shave some expenses and take another look. Then, prepare your revised budget. If it still doesn’t look like it should, do it again. If you have already scaled back on everything and it isn’t balancing out, make some calls to your debtors. Ask for reduced interest rates or how to reduce your payments. You can also suggest to them a different monthly payment other than the one they are asking you for. You never know what they will accept if you don’t make that phone call.
You are going to have to make tough choices. As I said, one that we did was dining out. We ate out only about 20 – 26 times for one full year (unless someone else took us out to eat). Was it hard – Darn Skippy it was!! Was it worth it? More than you can imagine.
Give yourself all week to complete this step. Next week we are going to talk about how to build an emergency fund and will introduce the Envelop Method. Oh – and you might want to eat out tonight before you do this – as it might be your last “hurrah” before the hammer falls on your dining out excursions.
(I am not a financial advisor and the information listed within these Debt Challenge posts is not to be construed a financial advice. This is knowledge we gained through our own personal experiences and information as outlined in Dave Ramsey’s Financial Makeover — and is being shared as such. Participants are not required to follow any steps listed if they do not wish to do so. Financial concerns/issues should be addressed with a professional in order to receive advice and assistance.)