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Hey everyone! Welcome back to another episode of Budget Friday. This is seriously my favorite part about personal finance, the chance to help others get on a budget, get out of debt and reach their financial goals. I love showing the power of a well-thought out budget plan, and the long term results they can have.
Today’s budget is an anonymous submission. We’ll call her Darlene.
Background: Darlene did not divulge her age (a lady never tells), but she’s probably not a day over 30 (based on her Roth/401k balance). She has been reading through the Budget Friday series and slashing through her credit card debt (recently paid off 3 cards). She also recently increased her investment contributions to 10% of her pre-tax income. I like where her head is at for planning, so let’s help her get on track to kill the rest of this debt with the quickness! Let’s check out some numbers:
- Home – (information not included)
- Retirement Fund Savings (401k and Roth IRA) – $21,246
- Emergency Fund Savings – $501
- Mortgage – $150,680 at 4.25%
- Personal loan – $3,537
- Auto loan – $7,894
- 401K Loan – $3,273 (payments auto-deducted from check)
- Credit Card – $1,946 (0% rate until June)
- Student Loan #1 – $10,321. at 4.25%
- Student Loan #2 – $13,166 at 3.75%
- Student Loan #3 – $42,799 at 6.25%
- Student Loan #4 – $3,896 at 4.25%
Total Debt: $86,832
- Build a small emergency fund
- Pay Off debt
- Build up general savings fund
- DEBT KILLER!
Here is her budget:
|Total Income||$ 3,916.00||$ 3,916.00|
|Total Expenses||$ 3,642.00||$ 3,916.00|
|Projected Ending Balance||$ 274.00||$ –|
|Monthly Income||$ 3,236.00||$ 3,236.00|
|Cell Reimburse||$ 110.00||$ 110.00|
|Utility Reimburse||$ 450.00||$ 450.00|
|Mileage Reimburse||$ 120.00||$ 120.00|
|Total Income||$ 3,916.00||$ 3,916.00|
|Mortgage||$ 1,079.00||$ 1,079.00|
|Electric||$ 100.00||$ 100.00||I didn’t lower this, but I’d look around at some of the fun ways to lower your electric bill. CFL bulbs, turning off lights when leaving rooms, etc. can save you a bit, and over the years it really adds up.|
|Natural Gas||$ 125.00||$ 125.00||Same here. Trying find ways to reduce this just by searching “how to reduce heating bill”|
|Cell Phone||$ 161.00||$ 161.00||You get re-imbursed for your sister’s usage ($80), so your $80 phone bill is not too bad.|
|Cable/Phone/Internet||$ 167.00||$ 45.00||CUT THE CABLE! Seriously, this will save you over $100 a month! With Hulu and free streaming of shows/movies online, there is no need for the cable. If you NEED sports, go to a friend’s house 🙂|
|Association Dues||$ 100.00||$ 100.00|
|Car Insurance||$ 167.00||$ 100.00||With selling the car, you can remove “Comprehensive” auto insurance, and you should be able to lower your policy quite a bit. As an FYI, we pay $80 per month for liability plus fire/theft/towing for my wife and I on our two vehicles.|
|Water/Sewer||$ 41.00||$ 41.00|
|Health Insurance||$ 151.00||$ 151.00||Is this cheaper than your employer-provided plan?|
|Credit Card||$ 533.00||Your snowball starts here!|
|Student Loan #1||$ 50.00||$ 50.00|
|Student Loan #2||$ 96.00||$ 96.00|
|Student Loan #3||$ 290.00||$ 290.00|
|Student Loan #4||$ 31.00||$ 31.00|
|Auto/Personal Loan||$ 434.00||$ 434.00|
|Total Bills||$ 2,992.00||$ 3,336.00|
|Food||$ 200.00||$ 200.00|
|Gasoline||$ 450.00||$ 300.00||$450 is CRAZY HIGH for gasoline. I suggest looking for carpool/bus routes, rideshare, or whatever other options your city offers to offset this cost. There are many more options for getting around besides dropping a ton of cash on gas.|
|Entertainment||$ 50.00||You WILL spend money on going out, might as well budget for it. This is a small amount, but with the amount of debt you are in, I don’t suggest going out a ton.|
|Spending Cash||$ 30.00||This is for spending on whatever the heck you want. When paying off MASSIVE amounts of debt, having a spending cash budget each month helps alleviate the pain from seeing all your money going toward paying off others. Treat yourself a little 🙂|
|Total Necessities||$ 650.00||$ 580.00|
|Total Expenses||$ 3,642.00||$ 3,916.00|
Now, I know you are wondering how I slashed so many of the car expenses, and honestly, you may not like it. But to really turbo charge the debt payoff here, we had to do something drastic.
Sell the car! Yes, I said! I know it seems extreme, but this is going to take a HUGE chunk out of the MASSIVE debt you have piled up. With an $8,000 balance on the car, I’m assuming it’s still new enough to sell for at least that amount to wipe out your auto loan completely. You cannot afford to keep paying interest on a depreciating asset that is only going to set you back a few more years if you hang on to it. I know cars are VERY hard to part with, especially if they fill a certain need (fits all the kids, weather issues, etc.), but this will be the single most impactful thing you can do to get yourself out of debt in under 10 years.
Now, you will want to make sure you can find a replacement vehicle right away, and I suggest checking out this post that I wrote on how to look for a used car. Essentially, you want to shoot for something around $4,000, find a vehicle that fits all your needs, and ensure it is reliable by searching “Common Issues with (type of car)”. I have personally not paid over $3,000 for a vehicle in 10 years, and we have saved THOUSANDS over the years. I recommend most anything by Honda or Toyota, as they seem to last longer than anything else on the road, and safe vehicles, and get great mileage. So, once you sell the car, use $4,000 from the sale to buy a used car, and throw the rest at the loan. Assuming you get at least $8,000 from the sale, that’s knocks your auto loan in half right there!
With that done, let’s get to the rest of the debt snowball. The current snowball is $533:
- Credit Card – $1,946 (paid off in month 6)
- 401K Loan – $3,273 (paid off in month 12) [snowball now $601]
- Personal loan – $3,537 (paid off in month 18) [snowball now $601]
- Auto loan – $3,894 (paid off in month 24) [snowball now $1,035]
- Student Loan #4 – $3,896 at 4.25% (paid off in month 28) [snowball now $1,066]
- Student Loan #1 – $10,321. at 4.25% (paid off in month 38) [snowball now $1,116]
- Student Loan #2 – $13,166 at 3.75% (paid off in month 50) [snowball now $1,212]
- Student Loan #3 – $42,799 at 6.25% (paid off in month 85) [snowball now $1,502]
As you can see, there is a LOT of debt to move through here, and it could take a little while. Do not get discouraged, because I bet it won’t take NEARLY this long to get yourself out of debt. The above assumes the balances don’t change from month to month on the debts that you are NOT focusing on (which is not true, but I didn’t want to run a calculation on each debt for each month including interest rates and all). It also assumes you don’t get any raises for 7 years, which (hopefully) won’t happen either.
Build a small emergency fund
I suggest having at least $2,000 on hand in case of emergencies. This should cover most things that pop up without stalling your budget any. You can do this in 3 months with your starting $533 a month snowball.
Pay off debt
See the debt snowball above!
Build up general saving fund
After 5 – 7 years of aggressive debt payoff, I suggest rewarding yourself with a sweet vacation. Seriously! And with $1,500 a month to work with now that you’re debt free, you can save up for something AMAZING in a month or two. Go ahead, reward yourself! You deserve it! After that, I suggest saving up 3 to 6 months of expenses, or about $8k – $16k. No biggie, though, because it’ll only take you 5 – 10 months to make it happen 🙂
You’ve got a big mountain of debt to tackle, but I would just take it one at a time. That’s the power of the debt snowball. You can take the smallest debt, knock it out quick, celebrate and then it’s on to the next. You will gain momentum each time you knock out a debt, especially starting at the 401k loan, because your debt snow ball will get bigger and bigger each time. I would say to keep checking back here for encouragement of others who are in the same dilemma, paying off debt and changing their lives for the better. Also, go over to Dave Ramsey’s website and check out the Success Stories. Those are great for helping motivate to keep up the fight and keep paying down your debt.
YOU WILL BE DEBT FREE! It will happen. I have no doubt that you can make this happen with some big changes up front, and a resolve to never borrow again! If you follow this budget, I bet you pay it all off a few years faster than I have laid out here. I see it all the time. People decide to change their financial future, and making great choices seems to compound in their lives, and things can happen faster and better than they ever imagined. You, too, can make this a reality.
Comments: So, what do you think? Is there anything you would have changed about my proposed budget? I’d love to get some reader feedback on what you would do. Darlene has a big mountain in front of her, but tackling it one debt at a time, I see her being a HUGE success!