UPDATE: Get the FREE Budget Your Way Out of Debt Guide HERE!
Debt can be a barrier to happiness and freedom. The effect it has on your life, relationships, and self esteem can be toxic. I found a way to drop the weight in a matter of days, maybe even hours. Obviously the debt didn't disappear, but when I had a plan that mapped out our progress and success; the stress, regret, and shame lifted and made room for inspiration, motivation, and passion to change our situation. I have found the strength to talk about my experience because I want to help others get out of the dark isolating space that toxic debt creates.
A concept discussed by Canna Campbell of SugarMamma.tv which inspired me, is taking a big goal and breaking it down into tiny achievable goals. It seems obvious, but sometimes you just don't see it when you're too close to the situation.
face your fears
Day 1: Know What You Owe
Calculate the total amount you owe today. For this step, leave out mortgages and any other debt attached to an asset. Include:
credit card balances
lines of credit
Include current balance, interest rates, remaining term of loans (years, months).
Day 1 is complete! Did you find that to be a challenging task? For many, just the idea of facing that number can be paralyzing. Face your number and then you're ready to tackle it.
create your budget
Day 2: How Low Can You Go?
What is the lowest amount your family can live off of? To find this amount you will build a MONTHLY budget and include all of your income and expenses. I recommend using a spreadsheet software like Microsoft Excel which makes it easy to add, delete, copy and paste and project your budget into the future.
First identify all income streams for your family for the period of one month. (I will do a future post related to managing a budget with variable income streams)
Then identify all monthly expenses. If this is the first time you have created or followed a budget, estimate the areas you are not sure of. These will will become clear as you live your budget over the next couple of months.
GET COMFORTABLE with the fact that this is going to be a fluid, MESSY PROCESS at first. It's unlikely you will have identified all of your expenses. You will likely underestimate some categories or overestimate others. That's okay. Live the budget and tweak it as you learn the real costs. (I was clueless about how much I actually spent on groceries so it was eye opening when I tried to spend as little as possible and still came out over my initial budget amount)
BE RUTHLESS! Consider every single expense category and ask yourself:
Is it essential?
If it is, can you renegotiate it? Get a better offer? Change providers? Reduce usage?
If it is not essential, consider how it is providing value in your life to determine if it should stay or if you can sacrifice it until you have achieved your debt free goal.
When it comes to reducing the amount of regular bills, sometimes all you have to do is ask, especially if you have been with a provider for a long time. Call your internet, phone & cable provider and see if they can offer you a better deal or consider switching providers for a special promotion. Maybe you find you're watching Netflix 90% of the time and you could consider cancelling the cable...and landline. We were able to reduce our bill from $120 to $64 just by getting rid of our rarely used cable.
Shop around your insurance rate. This takes some time but can be incredibly beneficial for the budget.
You can work on reducing, eliminating, or phasing out expenses over the next month, it may take time to get rid of some expenses depending on contracts you have entered into. You're working toward your "as low as you can go" monthly budget.
Day 3: Identify Recurring Expenses
Recurring expenses are those which do not occur every month but instead, periodically. They may be regular or random, they may be planned or unplanned. For these expenses you want to build up the funds to cover them when they occur. By planning ahead you eliminate the risk of slapping these items on a credit card and knocking you off your intense debt repayment plan.
Some expenses occur regularly but not monthly, like in Halifax, NS. Canada, Water bills come every three months, so you should park 1/3 of your expected bill amount in a bank account so you don't have a big hit to your budget every three months. Do this with any expense which occurs regularly, but not every month. Property Tax is another one of those types of bills. We are lucky enough that our city sets up a monthly pay schedule for our property tax but if you are paying twice per year, those two payment months can be rough on the budget if not planned for ahead of time.
Then there are the mini savings accounts to prepare for upcoming expenses. Currently I have SEPARATE BANK ACCOUNTS (nicknamed in my online banking) where I budget for an amount to be set aside each month for the following:
- First daycare payment: For when I return to work from maternity leave. I won't have money for daycare until I'm working, but I need childcare for my kids in order to work, so I have to plan ahead.
- Trailer Reno & Camping: In the past we put money into our @1975coachmenreno (camper trailer renovation) each summer. It's still a work in progress but it's functional. By making one account for this we have to make the decision to renovate or camp. With that decision set before us it's easy to hold off on the decor details and finishing the walls for the bathroom (a curtain is enough among family right?) and instead, spend the money on actually taking it out to enjoy with the family. Alternatively, if something needs to be repaired we will have money for it, it will just affect what we can spend on the actual camping.
- Kids Activities: I really believe that getting your kids involved in sports or the arts helps them build social skills and confidence in themselves. But holy moly this stuff can be expensive. In our community, the city runs swimming lessons so they are less of a financial burden, but we plan on doing Ringette next winter so I'm already siphoning money into the account to spread out the expense. As important as I think kids activities are, I don't think kids need to be in EVERYTHING. Don't break the bank so your kids can have a filled schedule. If you have kids, consider what you can afford to put them in and keep it simple. Check out what kind of community recreation programs are available in your area.
- My $500 project: As I have mentioned, I'm following Canna Campbell's $1000 Project but I have made mine a $500 project. This isn't really the same as the other accounts because it's not saving for an expense but instead it's a place for any side hustle money to go and when I get up to $500 I transfer it onto debt as an extra payment (ALL PRINCIPAL!).
- Gifts: The holidays land a lot of us in credit card debt as we go on a spending spree unheard of at any other time of the year. By planning ahead and building up a gifts account you can take the financial stress out of the holidays and it will also help you stick to a budget during the holidays. If you resolve to only spend what you have saved for gifts, you can carefully plan your gift giving and avoid last minute purchases (desperation is expensive). This account can also house the funds for birthdays, anniversaries, weddings, showers, and any other gift giving occasion. Try to determine the amount you would need for a year of gift giving, taking note of upcoming weddings. If it doesn't fit in the budget, take a look at what you spend on gifts. Loved ones (should) never expect you to be in financial hardship to give them a gift. Give what you can, get creative, and feel good about it.
That's all I have room for in my budget right now but these are not cast in stone, they will change as circumstances change, and I would love to add a travel account once we are out of debt.
Day 4: What Do You Want?
This is when you ask yourself the big questions. What do you want out of life? That's a pretty huge question, but an important one. Many of your goals cost money and in order to turn them from goals into reality you need to map out how you're going to get there. If you're reading this post, I expect that one of your goals is to get out of debt. Others may be buying a house, a car, a cottage. Perhaps going on maternity leave, paying for IVF, adoption. Maybe you're planning a wedding or filing for divorce. A career change, a big trip, caring for a family member.
It doesn't matter what it is. My experience is that once you can see HOW and WHEN you can achieve it, you're halfway there already.
Most of your goals are not going to fit into your monthly budget, and that's okay. When you knock off one goal or when space opens up in your budget, you can bring others on board.
For example, for me, debt repayment is my #1 goal and the focus of all my energy and extra funds. When debt repayment is done my focus will shift to retirement savings, education savings for my kids, travel savings, and other investing.
If you are in debt, you are wasting so much MONEY and TIME paying interest. In my view, toxic unsecured debt needs to be the #1 goal.
Life being as it is, you may have some time sensitive goals in mind that take precedence and rather than going into further debt, you could prioritize those in your plan. If this is the case make sure you cut the crap and be honest with yourself on how pressing these things are.
Maybe making it to your brother's destination wedding is a priority for you, but buying a new house can wait? Maybe having a baby right now is a priority for you, but a career change or trip can wait?
Question yourself and get critical of your decisions. Are these goals truly important enough to rank above debt repayment, or are you making excuses to avoid getting intense with your debt repayment plan?
When you have sorted out what you can set aside monthly toward these goals, enter it into your monthly budget.
Day 5: Review the Budget
You have created your monthly budget, well done! Does it work? Do you have money left over or are you in the negative? Adjust as necessary to make it align with your goals and update as you identify changes that are needed.
Now copy and paste this monthly budget in the next 11 columns of your spreadsheet so you can see where your goals will be in 12 months. This is where things get exciting. I got so carried away with it I ended up creating another spreadsheet where I tracked my expected goals until I'm 55 years old! It really puts things into perspective and shows you how much time you're wasting being in toxic debt instead of planning for the rest of your life! Finance has never been more fun.
Going Forward: Track it. Live it. Love it.
You have spent 5 days setting yourself up for success, now immerse yourself into the process and get passionate about changing your life!
I have built a ton of budgets over the years. They were thoughtful and detailed and inspiring. But then a week would go by without opening the spreadsheet, a month would go by and things weren't updated and the whole thing became useless. Without comparing to actual spending regularly, a budget is a waste of time. Then I started using Mint by Intuit and everything changed. (It's free!)
I tested out a few different personal budgeting apps and some people swear by other ones but I have found Mint to be exactly what I need and I would recommend giving it a try. (Try others too to see what works best for you. This may take more time up front but will be worth it in the long run) It will have you link all of your bank and credit accounts so not one coffee purchase will be unaccounted for.
If you choose Mint as your budgeting software, it will take a little bit of time to set up all your budget categories, but once that's done, it only takes a bit of adjusting each month for changes to your budget.
You can use the Goals feature to track your recurring expenses that you're setting money aside for as well as your larger, long term goals.
It's not perfect since it can't know how I want to use my budget, for example it may put a coffee expense into a "coffee shop" budget line, which I don't have set up. Really I want it to go to my personal spending budget line so all I have to do is stay on top of it, go into the "other expenses" where it drops anything which has not been categorized to my preset budget lines and I can change it to come out of my personal spending budget.
Using this program, I am able to check my budget progress every day on my phone and then get more detailed when I have time to sit down at my computer to review things.
Kill the Debt
How to Use the Money You're Saving by Following your Budget to Pay Off Your Debt
There are different strategies for structuring debt repayment. The best method for you will be a personal choice.
The debt-snowball is a good strategy to build motivation and focus. This method prescribes paying all extra cash toward the smallest balance debt and paying minimum payments on all others. The idea here is that you will build momentum by knocking off debts which will keep you motivated to keep going. When you knock off one debt, you move to the next largest balance and all the cash you were throwing at the first debt you can shift to the second, creating even more momentum. You continue on this way until all debt is re-paid.
If you were to do the actual calculations of how to most quickly kill off debts, the debt-snowball method would not be the winning strategy because it does not consider interest rates. However, if it is the method that keeps you on track it is the best method for you since paying off the debt with the highest interest rate is only a good plan if you are ACTUALLY paying it off.
From high to low
Based on the mathematics, the fastest way to pay down your debt would be to start with the highest interest debt and throw all cash in that direction while paying minimum payments on all other debts. When the first debt is paid off you would move on to the next highest interest rate and so on and so forth.
In my situation we had a variety of different payments, some on my husband's side, some on mine, and some joint. In order to simplify our repayment plan, and therefore keep us motivated and focused, it worked best for us to pay off all our debts (excluding vehicle loan and mortgage) with a consolidation loan. This strategy only works if you are truly done with your toxic debt and are ready to do the work to kill it off.
The danger with this method is that once you pay off everything with your consolidation loan, if you haven't changed your spending behaviour and decision making processes, you will simply incur additional debts on credit cards or elsewhere resulting in more debt than you started with.
We did our consolidation before I dedicated myself to our Mint budget and debt repayment plan so with me on maternity leave and my husband in business start up mode, as a family we were living on 35% of what we had been used to. We crept back into some credit card debt, the very reason that a consolidation loan can be dangerous territory.
When my husband left his job to start his own business we wanted to leave as much money in the business as possible to ensure its success, so we had to determine what our "low as we can go" budget looked like. The fear of uncertain income pushed us to follow that budget and save with gusto. The changes we made will allow us to more than double our already aggressive biweekly payments on our consolidation loan, and we project to kill the loan more than two years earlier than scheduled.
The lesson here is that a consolidation loan can be extremely helpful or extremely detrimental. If you do want to go this route, I would recommend that you first set up your budget, live it for a few months, follow one of the other methods in the meantime, and consciously make the behavioral changes required to make it work.
Get Inspired. Get Motivated.
The road to becoming debt free may be long but it doesn't have to be tedious and it doesn't have to be lonely. The debt free community online is massive and and spreads worldwide. Though debt is a concept as old as time, its current prevalence and depths are new. More than ever we are sold to directly in our homes, purchasing with the click of a button. We are bombarded with offers of credit and extended more than we may ever seek. But this cashless society is not something we learned how to manage in school and our parents' experiences were so different, they could not have foreseen the plastic tapping world we live in today to prepare us. If you are in a kind of debt that makes you uneasy or even sick to your stomach, you are not alone and you CAN come out the other side more financially savvy than you ever thought possible.
In order to stay focused, a simple strategy is to visualize what debt free life will look like for you. For me I imagine my travel account growing each month to provide me with guilt free adventures. I imagine my children getting an education without student debt. I imagine building passive income streams to provide the financial freedom I crave and allow me to give generously. I imagine feeling lighter, feeling at peace, and feeling like I can achieve anything.