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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 Karen.
Background: Karen reached out to me for some help getting out of debt and getting her family on track with their finances. She’s married with kids and wants to eventually get into a home. The only thing standing in her way is a pile of debt. Let’s check out some numbers:
Assets
- Old work truck – $1,000
Debts (Balances)
- Student Loans – $55,000
- Car Loan – $16,000
- Credit Card – $14,000
- 401k Loans – $1,250
Goals
- Family vacation once a year
- Build up a savings account
- Purchase a home by March 2014
Here is her budget:
| Old | New | Comments | |
| Starting Balance | Â $Â Â Â Â Â Â Â Â Â Â Â Â Â Â – | Â $Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â – | |
| Total Income | Â $Â 3,800.00 | Â $Â Â 3,800.00 | |
| Total Expenses | Â $Â 4,071.00 | Â $Â Â 3,800.00 | |
| Projected Ending Balance | Â $Â Â (271.00) | Â $Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â –Â Â | |
| Income | |||
| Monthly Income | Â $Â 3,800.00 | Â $Â Â 3,800.00 | |
| Total Income | Â $Â 3,800.00 | Â $Â Â 3,800.00 | |
| Bills | |||
| Rent | Â $Â Â Â Â 850.00 | Â $Â Â Â Â Â Â 850.00 | |
| Electric |  $    300.00 |  $      150.00 | Read up on how to cut your electric bill in half over at my buddy Mr. Money Mustache’s site. His bill in Colorado averages $25 a month all year. You can EASILY get down to $150/month implementing these changes. Also, see if your landlord can make any changes to your lighting/heating for more efficiency. Doesn’t hurt to ask 🙂 |
| Natural Gas | Â $Â Â Â Â Â Â Â 60.00 | Â $Â Â Â Â Â Â Â Â 60.00 | |
| Cell Phone |  $    125.00 |  $        45.00 | $125 for two smart phones is about average, but I recommend checking out Republic Wireless. You can get a Republic Wireless $19/month Unlimited Data, Talk & Text plan to cover your cell phone needs. The phones are $99, but after that, it would only be $38 a month plus maybe $8 in taxes! You would effectively save $80 on this plan. |
| DirecTV | Â $Â Â Â Â Â Â Â 60.00 | Â $Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â – | While you’re in this debt, you NEED to cancel your TV services! With free TV shows on Hulu.com and local channels through an antenna (with digital box if needed), DirecTV is unnecessary and will keep you in debt. |
| Student Loan | Â $Â Â Â Â Â Â Â 96.00 | Â $Â Â Â Â Â Â Â Â 96.00 | |
| Car Insurance | Â $Â Â Â Â 120.00 | Â $Â Â Â Â Â Â 120.00 | |
| Water/Sewer | Â $Â Â Â Â 100.00 | Â $Â Â Â Â Â Â 100.00 | |
| Garbage | Â $Â Â Â Â Â Â Â 30.00 | Â $Â Â Â Â Â Â Â Â 30.00 | |
| Medical/Prescriptions | Â $Â Â Â Â Â Â Â 40.00 | Â $Â Â Â Â Â Â Â Â 40.00 | |
| Target |  $       60.00 |  $        20.00 | Shopping budget needs to be cut while getting out of high-interest debt. Thrift stores, garage sales and clothing swaps are you new best friend 🙂 |
| Chase Credit Card | Â $Â Â Â Â 150.00 | Â $Â Â Â Â Â Â 959.00 | Once the 401k loans are gone, kill this credit card debt. |
| Preschool | Â $Â Â Â Â 300.00 | Â $Â Â Â Â Â Â 300.00 | |
| Car Loans | Â $Â Â Â Â 460.00 | Â $Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â – | This may seem like tough love, because it is. You NEED to sell the car. You cannot afford a $16,000 loan while you’re this far in debt. Not to mention it requires more expensive insurance to carry that loan. Over a quarter of your money is going toward auto expenses each money ($1,000), just to get you around (for reference, we spend just 7% toward auto expenses). That means 2 hours out of EVERY DAY you and your husband go to work, it’s all just to pay for your transportation. You MUST get rid of this vehicle and buy a good, used car if you want to reach ANY of your goals. |
| Total Bills | Â $Â 2,751.00 | Â $Â Â 2,850.00 | |
| Necessities | |||
| Food | Â $Â Â Â Â 400.00 | Â $Â Â Â Â Â Â 400.00 | |
| Gas | Â $Â Â Â Â 420.00 | Â $Â Â Â Â Â Â 420.00 | Please consider finding alternate way of getting to work, such as carpool or bus passes. This $420 a month is KILLING your budget. Hopefully with the new car you can get more fuel efficiency. |
| Date |  $        60.00 | This is REQUIRED for all married couples. Never stop dating, and always set aside money to get away and reconnect. I always say this is the MOST important line item in the budget 🙂 | |
| Husband’s Vices | Â $Â Â Â Â 500.00 | Â $Â Â Â Â Â Â 150.00 | This is also KILLING your budget. He needs to realize that you will NOT be able to afford a home until this habit is kicked. I know it’s tough to drop a vice (I’ve had friends try and fail MANY times), but this expense will keep you in debt and kill your financial future. Get some assistance, and cut back drastically. I left $150 in there for the first phase of pulling back, but this will need to STOP to get you to your goals sooner. |
| Total Necessities | Â $Â 1,320.00 | Â $Â Â Â Â Â Â 950.00 | |
| Total Expenses | Â $Â 4,071.00 | Â $Â Â 3,800.00 |
Phew! I know there a lot there, and it may seem like a mountain, but let’s run the numbers and see where you land.
Debt Snowball
- 401k Loans – Kill these first, as a change in employment would require the full balance of these due immediately. Before tackling the credit card as I have listed in the budget, pay off these loans with the $809/month you now have extra. These should be gone in 2 months. Since these payments were direct from your check (not listed above), you should be getting $50/month back.
- Chase Credit Card – $14,000 (paid off in 14 months using $1,009/month)
- Student Loans – $55,000 (paid off in 4.5 years using your $1,009/month)
Goals
1. Take A Yearly Family Vacation
Family vacations are great, but right now you have a roadblock, namely your credit card debt. I recommend NOT taking a family vacation (except maybe a weekend trip somewhere nearby or a camping trip) until that debt is gone. If you follow the debt snowball above, your CC debt will be gone in 2 years, and then you can save up for a family vacation before diving into your student loan payoff/house savings phase. I recommend saving about $100/month AFTER you are out of debt COMPLETELY for your vacation fund.
2. Savings
Once you have tackled your mountain of debt, you can focus on building up your savings account. I recommend building up 3 to 6 months’ monthly expenses before tackling your next BIG goal below. Your expenses will be closer to $3,000 a month now, so save up between $9k – $18k.
3. Buy a house by March 2014
As you can see above, you will not have the money to buy a house by March 2014. I suggest being out of debt before making such a HUGE purchase, unless it’s extremely low-interest debt that is NOT on a depreciating asset (i.e. a car or TV or something). So here’s where I may get a bit controversial; You may be able to buy a house before paying off your student loans. If you have locked in some RIDICULOUSLY LOW RATES (like 3%), you have 3-6 months’ worth of savings put away, and can save up a 20% down payment on a home, then yes….you can buy a home.
That may seem like a LOT, but you can’t approach purchasing a home lightly, as it is the BIGGEST LIABILITY you will ever own. Making a purchase too soon could put you in a MUCH worse position that you are in now, and would negate any of the positive effects of rocking this awesome budget.
If you want to turbo-charge your house purchase, there are some more things you can do. For one, you can take on a side hustle to make some extra income. Here are a list of 20 ways to make extra money for inspiration. You should also be done with preschool soon, and can throw that $300/month toward your debt payoff/savings. And the final $150/month will come when your husband’s vice expenses are gone.
Final Thoughts
Karen, I want you to hit the goals you have laid out. And it’s going to require what FEELS LIKE sacrifice for a little while. But here’s the awesome part, it may feel like restriction, but it’s really FREEDOM! Losing the chains of a $16,000 car payment in one fell swoop is scary, but it’s a HUGE step toward freedom! Working on your husband’s vice will be TOUGH, but again, it’s a BIG LEAP toward your dream of owning a home.
You have a lot of potential in your budget for cutting out things you DON’T NEED to get you to the things you REALLY WANT! But this whole thing hinges on you having your husband on board, and making the drastic change of selling your car. Those two things will help you gain momentum, and all the other changes will fall in line as you see the successes happening right in front of you.
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. Karen does have a tough short-term road ahead, but the long term effects of sticking to this budget are HUGE.
Disclaimer: There are a few affiliate links in here for recommended products/services. I do receive a commission if you purchase through my link. Thank you VERY much for any and all support 🙂
Wow, my heart breaks for Karen and the worry she must feel trying to manage everything with debt and a being in the red every month. Congratulations to you for reaching out and exploring options to improve your finances and your lives.
I hope your husband is on board. If not, maybe seeing your numbers in writing and knowing that your family spends more on vices in a month than food will hit home and he will commit to the plan. Obviously, your kids are young, so you have time to turn it around so they don’t grow up thinking being in debt is the norm. If it doesn’t happen overnight, don’t lose hope.
There was no mention of health care, so I hope you have insurance. If not, you should be eligible for free or very reduced cost insurance with Obamacare in place now. I would strongly recommend signing up. You can’t afford a big medical bill.
Lastly, I think your family needs to find a way to earn some more money. Cutting expenses will help a lot, but if you have big dreams, like a house, you need to bring in some more income. Keep reading blogs. There are tons of ideas there. Best of luck. I would love to see an update down the road.
Thanks for your thoughts here, Kim. Healthcare is through employer, but I know things are changing in that realm, so good call on looking into the options. And yes, earning some more money each month (even if on a small amount) can help tremendously. It has for us, that’s for sure.
Good stuff Jacob. The one thing I would do a little differently is I would start putting a small amount each month into a savings account, maybe $50 or $100. There is literally no savings right now, which means the habit has to be built up. It will also be good to have cash on hand when unexpected expenses come up, which you know they always do. Much better to have some actual savings on hand to handle them then to have to resort back to the credit card.
Good call. An EF to break the dependence on CC’s if the right move.
Amazing post, Jacob. I’m going to have you do mine sometime. I could use the reality check.
Just shoot me an email 🙂
Great breakdown. Given their debtload and the fact that there are kids, I have to agree that a small er fund should be made necessary. Even $50/month until they had 1k.
$300 does seem like a lot for an electric bill! I’m sure there are some ways to get that way down?!?
This reminds me of Tough Love! It’s drastic, but if Karen wants to be debt-free sooner than never, this will do the trick. Awesome budget, Jacob.
Agreed, the car and the gas have to go. A good used car will do just fine until you’re back on your feet. Kudos to Karen for being brave enough to share her finances. Make Jacob’s changes and you’ll be in that new house before you know it!
Jacob,
EXCELLENT job – AGAIN!!!!!!!!!!!!
Karen,
Listen to him – he really knows this stuff.
p.s. soon people are going to be paying big bucks for his advice – so heed it well.
I hope Karen reaches her financial goals. You can do it, girl!
$500 per month for a vice?! Definitely phase it out! I’m not a fan of cutting out activities that we enjoy, but if you’re in high interest debt, you simply cannot afford to spend that much each month on a vice.
Also, love the mandatory date budget!
A little late to the game, but I have to comment about this sentence:
“And it’s going to require what FEELS LIKE sacrifice for a little while. But here’s the awesome part, it may feel like restriction, but it’s really FREEDOM!”
This is so true. It really does stink in the beginning, but is so liberating when the financial mess is gone. Good luck!