From Domino.com via Pinterest
Resolutions are not my thing! Planning however is. In case you haven’t seen the movie 20 odd times like I have, the picture you see above is the kitchen from (the movie) It’s Complicated, and while I loved the movie itself, it is this kitchen that keeps me watching it every time it is on the television! I can only imagine how much a kitchen like that would cost, but I plan to come as close to it as I can…..on a shoestring budget……paid in cash!
When planning our goals for 2016 (and beyond), as much as I really want that kitchen, becoming debt free is at the top of our list! Years of poor financial decisions, “I want it now” attitude, letting our money rule us instead of us telling our money what to do has left us with some debt that, while manageable, is like a dark cloud hanging over our heads.
In 2001, after 28 years at the same workplace, Tim lost his job and we knew it was time to have a hard look at how we were spending our money. Thankfully it wasn’t long before he was settled into a new job, which he still has today. But it didn’t take long before we got back into old habits and debt repayment took a backseat to other “priorities”.
After re-evaluating those priorities and making a written plan on how to move forward with our debt repayment it is time to revisit those strategies and buckle down to get the job done!
We are by no means experts, I am just happy to share what works for us and I hope it gives you a bit of inspiration to reach your own financial goals!
Our rule # 1
Face the music! There is no getting out of debt until you know exactly how much you owe. Gather all your credit card and loan statements and do the math. For many this is the most difficult step! If you haven’t opened a credit card statement in awhile, you must do it now.
You also need to add up how much these debts are costing you each month. In other words, what is your total minimum monthly debt repayment obligations each month.
Trust me, this step is half the battle in your quest to become debt free! For me, it felt like it put the power back in my hands.
Our rule # 2
Stop using credit. Cut up those cards, freeze them in a block of ice or give them to a trusted relative. It will be impossible to get out of debt if you keep adding to it!
We have many plans for the Red Cottage this year including starting our kitchen update, but I have already resolved to only spend cash to get the project finished. That means that I will have to pack my patience, but having no extra payments at the end of the project makes it more than worth it!
Our rule # 3
Track your spending! Get a little notebook and track each and every penny that leaves your wallet (or bank via a debit card or credit card). Each and every coffee, tea, gas fill-up, pack of gum.
List the date, the amount and what was purchased each and every time you make the purchase. If recording it at the time is too cumbersome, make sure you get a receipt for every purchase and list them all at the end of the day. If you are on this debt free journey together, both partners need to track their spending.
(While we do this on an ongoing basis, I recommend you do this for a minimum of 2 weeks before laying out your budget and debt repayment plan. This will give you an idea of where your money leaks are and what you can do to plug them up. If you are spending even $2 a day on coffee, over the course of a month you have spent about $60. You could make your coffee at home and divert that $60 to paying down a credit card!)
Our rule # 4
The dreaded budget. Trust me, it is a very good thing. Good old pen and paper is the way we roll. We have recently been looking at You Need A Budget (YNAB) for our budgeting, but for right now pen and paper is working just fine.
When planning your budget, consider paying yourself first. Even if it is only $5 or $10 per pay, and building up from there. Nothing is better than seeing credit balances going down as seeing a balance in savings to up. Having some savings will allow you to cover any real emergencies that you normally would have turned to credit to cover.
Begin by entering your total monthly income. Subtract from that your fixed monthly expenses. These are expenses that you are obligated to pay each and every month. This would include your mortgage (or rent), utilities, your insurance premiums, and your monthly debt obligations, and the savings we talked about above.
From the remaining balance, subtract your variable expenses. These are the expenses that while they occur monthly, you have some control over. These would include groceries (I highly recommend starting to meal plan to keep food costs in check), or things like insurance that you may be able to negogiate better rates by shopping around.
Next subtract your “extra” expenses from the remaining balance. These would include entertainment, restaurant meals, sport fees, etc. Any fees that are not necessary and could be cut if your income doesn’t allow for them after your fixed and necessary variables have been accounted for.
We consider expenses such as cable, cell phone, “fun money” to be variable because we can afford to include these in our budget and have some control over them, but if you are deeply in debt and/or cannot make ends meet you should consider these as “extra” expenses. (Admittedly though, if it were entirely up to just me, cable would be gone and that payment diverted to debt to excelerate our debt freedom date!)
Even if you are living paycheck to paycheck consider adding a category in your budget for “giving”. I cannot tell you how satisfying it is to know that a bit our hard earned money goes to a greater good each month. Aiming for 10% of your monthly income is a common goal, but if 1% is all you have to offer right now. When it comes to giving, do so with your whole heart and you will reap the benefits tenfold!
Each and every dollar should have a job, so if there is money left over to budget after all your expenses are listed, it is our rule to apply these to our debt repayment plan.
Our Rule # 5
Work out a debt repayment plan. Some call it a snowball plan, but we have actually used Mary Hunt’s Rapid Debt Repayment plan which works really well. You simply enter your debts, your minimum monthly payments and any “booster” amount you have available in your budget to pay down debt faster. The calculator gives you a run down of how quickly you can be debt free if you never change the total monthly debt payment. It is just one element of her website Debt Proof Living that will help you reach your debt free goal!
In other words, if you have a revolving credit card whose minimum payment lowers each month as the balance lowers, you would lock into the minimum payment as it is when you start the plan and never change it regardless of whether it goes down or not. It is amazing how much quicker a credit account can be paid off just by using this method alone!
Our Rule # 6
Hold regular monthly budget meetings with your partner (if you are attached) or if you are going it alone spend a scheduled time each month reviewing the budget. It is essential that you discuss and tweak the budget monthly as required. Giving each dollar a job on paper at the beginning of the month makes the rest of the month a lot less stressful as far as finances go! And making all those decisions together makes for a much more harmonious marriage!
While we have a way to go, we are at a point in our journey where we can see a light at the end of the tunnel, which includes being mortgage free in under 5 years!! Working towards a contingency fund (six months of living expenses) to have tucked away for big emergencies like (God forbid) another season of unemployment is also part of our plan, but currently our number one goal is being debt free!
Don’t get discouraged if you do all the above steps and your money ends before your month. Revisit your monthly expenses and consider what you will have to do without to make the budget balance. There may be some tough love involved, but just think of the freedoms you will be rewarded with when you reach your debt freedom day! If you have cut the budget to the bone and you are still having difficulty, consider any ways you can bring in extra income in order to balance the budget. You can visit my Finances Pinterest Board for lots of tips on ways to save money you may not have thought of!
If things are just too much to manage on your own, consider contacting your local not-for-profit Credit Counselling Service. For a list of such services in Canada click here.
While we do have several plans for the Red Cottage this year, I want to make sure our most important goal of becoming debt free stays on track. Having a financial plan in place keeps me (and my project list) in check!
Until next time….