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In November, we did a case study on Terri*, who is over $300,000 in debt. We will be following her journey all year long as she tackles the debt and gets her budget back on track.
Be sure to read ONE MOM’S PLAN TO PAY OFF SIGNIFICANT DEBT QUICKLY for details on how she found herself $330,000 in debt
This month, we’re digging deep into her budget. We know that she makes a pretty good income (a lot of which is variable as blogging income comes in), but also has a lot of debt and expenses. This makes budgeting difficult for her. For the purposes of establishing a worst-case-scenario budget, she’s only used income she knows for sure she will have each month.
Before we dive into her budget, let’s take a look at the debt paid off since we introduced her in November:
Debt Paid Off in December
- Toll Fee: $63 {Paid Off!}
- Lawyer #1: $100 {Paid Off!}
- Lawyer #2: $200 {Balance: $2,137.47}
- Facility Rent: $1,875 {Paid Off!}
- Medical Collections: $141.92
- Student Loans: $75
- Mentor #1: $1,250 {Balance: $625}
- Mentor #2: $350 {Balance: $350}
- SUV: $237.02 paid to principal balance* {Balance: $2,618.60}
- Personal Loan: $267{Balance:$4,099.51}
- Mortgage: $168.38 paid to principal balance* {Balance: $102,127.43}
- Lease Payments on Kitchen Items: $224.34 {Balance: $373.19}
= $4,951.66 debt paid in December
You’ll notice that credit cards aren’t listed above. The reason for this is because she just made the minimum payments on them in December, and with interest, this was basically a wash. * Even though she’s paying a lot more than this, it’s easier to keep track of debt payoff when focusing on what goes towards just the principal.
Credit Card Balances
- Discover: $1,505.25 (-5.25 overthelimit)
- Chase: $10,358.44 (-358.44 overthelimit)
- Capital One: $3465.03 (34.97 available)
- Barclay: $1,993.43 (6.57 available)
- Paypal Credit: $1,346.46 (5.54 available)
= $18,668.61 credit card balance
Terri did well paying off almost $5,000 of debt in December! Here’s what didn’t go so well:
- She was so quick to pay off stuff as money came in that she didn’t account for her regular bills. This caused several overdrafts. It’s good she’s created a budget for January so she’ll know what’s coming in and going out. 14 NSF fees at $28 a piece! That’s $392 in NSF fees in December alone!
- These NSF’s led to her Chase payment bouncing. Because this is taken out at the end of the month, she wasn’t notified about it until January. She had to shuffle money around quickly to pay December’s payment as soon as that notice came in.
- Because she wasn’t watching her money coming in and out closely, she spent money that was already allocated for. While it did go to debt payments, it still was feast or famine. This led her to pay off things as soon as the money hit her account, and then she was living like she was broke until the next payment came in. She wouldn’t have even been able to get milk or bread from the store. This is a dangerous place to be.
Account Balances:
Checking: $712.13
Paypal: $275.45
HOW TO BUDGET YOUR MONEY WHEN YOU LIVE PAYCHECK TO PAYCHECK
Had Terri set a budget for December, she would know what money was coming in and what money was coming out. Instead, as soon as money came in she put it towards debt without accounting for the stuff already scheduled to come out. This led to almost $500 in overdrafts, her Chase credit card payment bouncing, and a lot of stress.
Overdraft fees can be avoided if you tell your money where to go every month!
– Kathy Haan, MBA @IAmKathyHaan
If your income is less than your expenses, you need to either cut down on your expenses or you need to increase your income. There’s no magic formula.
Ideas for increasing your income here
Ideas for reducing your expenses here
Before making out her budget for January, she had to first figure out what was going to come out each day. I like to do this by printing a calendar just for the month.
If you’d like a free copy of your own to print out, fill this out:
To make it easier to see what’s planned, she’s highlighted like items:
- Green: Known income
- Orange: Utilities
- Red: Debt that will be paid in full this month and should not show in future months
- Blue: Debt
- Yellow: Business expenses
The highlighters we used come in a pack of ten and are super smooth. You can get them here.
Now that we know the set bills each month, we need to figure out those variable expenses. These variable expenses are things that still happen and have to be budgeted for, even though they’re not necessarily due that month. I’ll explain.
Let’s say that you pay your property taxes semi-annually. Your bill every six months is around $800. Rather than paying this large payment each time it comes due, you budget for it monthly. $133.33/mo looks and feels better than a huge payment of $800 you forgot about, right?
How to Budget for Big Expenses
You will need to first list out these expenses. Some ideas are: property taxes, homeowner’s insurance, homeowner’s association dues, emergency fund, business trips, Christmas, birthdays, etc.
These expenses are estimated, and then divided by the number of months in the year. This way, you’re not paying for Christmas only in December, but budgeting for it all year long.
We created a tracker that makes it easy to see at-a-glance how well she’s doing with this. She marks each bubble in green when she successfully allocates money to that expense for that month, and in red when she doesn’t meet it. Here’s an example of how this is done:
Terri also knows that her vehicle is getting to the point where in the next couple of years or so, she’ll need to replace it. While not set in stone, she’d like to purchase a higher-end used vehicle. She’d also like to remodel her office. Because these are wishes and not really necessities, if there’s room in her budget or she has a windfall, she can allocate it to items on her wish list.
You can download the 2019 Big Expense Tracker for free! Just put your details here:
Now that Terri has an idea of her fixed and variable expenses and broke them down by month, she can budget the rest: groceries, gas, entertainment, savings, health care, etc.
For January, her known income that will for sure come in is $5,325.36. She budgeted $4,683.93, leaving her $641.43 to put towards debt this month. However, because Terri is also a blogger she will likely have other income that comes in this month. This is through her courses, sponsored posts, ad revenue, etc.
Any excess will be applied to a cushion in her account so that she can avoid overdrafts, and some towards debt. She’s aiming to have a $500 buffer at all times.
In our next update, we’ll break down how to incorporate the envelope system into your budget.
