Thursday, May 16, 2013

The great budget crisis of 2013

So, if you've been reading this blog for a while, you know that I started some "First of the month" goals a few months back. I was doing pretty good up until I found out I was pregnant, and then the whole damn thing went out the window. I was just focused on surviving the first trimester and getting through those tough few months that I set the goals aside. Well, I've decided to take a different approach. Now that I'm in the second trimester, I am feeling better and much more energized. One of our main concerns about having a baby has been finances. Living in one of the most expensive places in the US, and not making a ton of money has left us strapped for cash a lot of months. But I have no idea where that money is going, and why I always end up at the end of the month scraping together pennies to make ends meet. I decided to do something radical. Well, radical in my mind. I read a few blogs about budgeting and how to live on a tight budget and they kept mentioning this book Dave Ramsey's The Total Money Makeover. On a whim, I bought the book (on Kindle for Mac, so it was only $9 - see? I'm worried about this stuff!) and I started to read it. Turns out, it's actually a pretty good book. (Disclaimer: it's somewhat religious, and very conservative, so it might not be for everyone - a couple Bible verse quotes don't really detract from the message, at least that's what I think). I'm about halfway through the book and it's a really easy read. Most of the points he doesn't have to convince me of at all. I was interested to see what the "steps" would be to stop fretting about money and to start saving money.

So, here are the first ideas to embrace:
1) Credit is bad. All forms of it. Pay cash for everything (including big ticket items like cars - more on this later).
2) You need to know where your money is going. For that, you need to do some work (make a budget, stick to it, etc)
3) The whole family needs to be on board for this because it can be painful.
4) You need to sacrifice a bit now to live "the good life" a little bit later. 

These ideas seemed pretty straightforward to me, so I thought I would put them to the test. I made a budget, and it looks something like this:
Monthly Income: $6434.62
Monthly Bills: $3105.26 (this includes rent, utilities, cell phones, taxes, car payment, and even the little stuff like Netflix and the newspaper subscription)
Monthly expenses: $905 (these are things that could change monthly like groceries, gas, doctors appointments, toiletries, etc)
Monthly Cash allotment: $400 (this is $200 each, which is somewhat generous, but I think I will keep it that way for now)

So, if you add all these things up and subtract them from our income, what do you get? Are we in the red? Are we just barely scraping by? NOPE! The difference is a whopping $2024.36!!! In the black, baby!

So, what does this mean? We have been inadvertently burning about $2000 a month without even knowing it? Is that even possible? I have honestly no idea where the money has been going. What's the problem?

Well, I had just about enough of this after figuring this out. So, we've decided to do something about it. We are going to start following the steps to a Total Money Makeover. So far, here are the steps recommended.
1) Write down your budget. List everything and anything you can think about. List ALL expenses, ALL debts. Is there anything you can change? Cut? Anything you can live without?
I have to say that doing this step was a HUGE eye-opener for us. And it actually felt pretty empowering to know that we were taking control of our finances instead of just floating on every month.

2) Save $1000 in an emergency fund. And do this fast, like in 2 weeks, or at least less than a month. This gives you an emergency cushion in case the car needs repairs, or you have an unexpected expense. Make sure it's fairly liquid (i.e. you can access it if you absolutely need it) but also make sure it's somewhere that you won't be tempted to touch it (i.e. don't put it in an envelope in your kitchen cabinet - you will use it for pizza).
It turns out that we already have a cushion, which I was pretty surprised to discover. It actually made me feel pretty good to know that we did have a cushion in case anything went wrong.

3) Create a Debt Snowball. List all your debts from smallest to largest. Put as much money possible toward the smallest debt. Sell stuff, take on extra hours at work, do whatever it takes. Ignore things like interest rates and just make the minimum payments on all other debts. In this step, you are trying to make progress and motivate yourself, so the faster you can pay something off, the better you feel and the more motivated you are to continue paying off your debts.
This step for us was also a big eye opener. We don't really have any credit card debt, but we have a car loan for about $10,000 and student loans that together are about $50,000. This means we are over $60,000 in debt! Can you believe that? Luckily for us our student loans are in deferment while we're postdocs, but as soon as that job is done, those student loan payments will come roaring back at us. And I thought we were totally good on our car loan because we qualified for a loan with 0% interest. But we all know nothing in life is free. Turns out that our $228 monthly car payment includes $25-30 in "finance charges"! We are being charged 10% of our monthly car payment in fees! We were duped! No wonder they tell you to pay cash for a car! It also turns out that one of my student loans is higher interest that I would ideally like to be paying. Good thing I decided to look these things up and figure this stuff out.

The Plan: Scrimp, sacrifice and put as much money toward the car loan payment and the student loans as possible. Then go on to tackle the rest of our student loan debt, and hopefully be debt free in a couple of years! Sound impossible? Well, think of it this way. We can say that we have an extra $2000 a month. If we put ALL this money toward the car payment, we will have it paid off in 5 months! This means that right around the time I am having a baby, we can mark our first goal off the list! How cool is that? The high interest student loan is for about $7000. This means that about 4 months after the baby is born, we can mark our next goal off the list. I don't know about you, but being able to knock out two HUGE debts in less than a year is pretty motivating!

A Couple Problems: Obviously, we are having a kid. This can put a wrench in the best of our intentions. Once we are fully involved in daycare, at least $1000 (probably more) of our extra money will be devoted to daycare alone. Plus there are other expenses that we likely can't entirely anticipate. Doctor's appointments. Supplies like diapers or formula. Clothing, etc. So obviously, this budget thing will have to be re-done on a monthly basis. However, just knowing that we have our emergency cushion makes me feel quite a bit better. There are also some other things that I need to work on anticipating (like the price of childbirth), I can honestly say that I am starting to feel so much better about our financial situation. I feel like we are finally in control of something that I have struggled to understand or do something about for a very long time. And it feels great to know that we can actually pay off our student loans before our kid needs to take some out. Heck, we might even be able to save up for college for the kid now (which was a distant pipe dream in the past).

Other things to work on: We also have an excess of stuff, for lack of a better term. We have to get rid of a lot of stuff to make a nursery, and I am SO looking forward to purging a lot of our things. Call it my crazy second trimester! I am going to try to sell as much as I can to generate as much cash as I can to either put toward preparations for the kid or paying off our debts. I can honestly say that I sleep a little better at night, knowing more about our financial situation, and I am really looking forward to getting this Debt Snowball running!

1 comment:

  1. Good work dude! I'm trying like hell to pay stuff off right now too and these are all great tips I apply in my daily life. You can do it!