Beating Broke

Personal Finance from the Broke Perspective

Beating Broke Rules: Budget

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If you’ve ever been involved with a company’s financials or been an investor researching a company, you likely know that they all have budgets.  In fact, they would have a pretty big problem if they didn’t have budgets.  And even with budgets, they still have problems when those budgets are unbalanced at the end of the quarter.  An unbalanced budget that is in the red can cause a paper loss of millions (or billions) in stock price.  That makes for a lot of unhappy investors (read owners).

Why shouldn’t those same rules apply for your personal finances?

Beating Broke Rule: A budget is a must.

Let’s face it.  Only the Government gets away with an unbalanced budget.  If you or I were to take up similar fiscal actions, we’d be declaring bankruptcy every year.  The bottom line is this; If you want to be fiscally responsible and be in control of your finances, you’ve got to have a budget.  And it must balance.  Must!

Let me finish by finishing the analogy.  Think of your personal finance situation as a “business”.  You and your Wife (or partner and any children you may have) are the shareholders.  When the “business” does poorly (i.e. runs in the red) the shareholders lose value.  Only, instead of being able to sell the stock and find a better performing “business”, you have preferred stock that is non-saleable.  What’s more, you’re the CEO, CFO, CIO, and mail room attendant.  There is nobody you can fire for poor performance and you can’t trim your labor costs with layoffs.

The only way for your “business” to perform well is to have a budget that balances.  If you really want to make your “shareholders” happy, you’ll find a line item in there for savings as well.

Analogies aside, a budget can really help you see where your money goes and helps you get in control of your money.  Instead of trying to find a few dollars at the end of the month to pay bills, you might just find a few extra for an ice cream cone or two.  If you’re curious how to create a budget, read my article on building a simple budget to learn how we created our first budget.

Where We Began

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I’ll spare you the pre-story except to say that my wife and I both did a lot of things wrong financially in our college years.  Lots of college loans, credit card debt, and little to no savings to speak of.  We got married, and still we continued on our merry way.  We bought a house long before we really could afford to and even added a dog.  Then we got pregnant and our financial inproprieties caught up with us.  We struggled and struggled and eventually, just months before the birth of our son, we saw the light.

Total Money MakeoverThat light, courtesy of a book called Total Money Makeover by Dave Ramsey, may have saved our financial lives.  Maybe we would have continued to barely make it, but we would have never made it to where we are now.  It’s been a little over a year since we started our makeover and we’ve seen some pretty amazing results so far.

When we started the plan, we were struggling financially.  Our debt to income ratio was well over 40% and the best we could do was to pay the minimum on everything and hope that there was still money in the bank when the checks came through.  All told, we had debt of over $100,000 and total income of less than $50,000.  We may have been on the verge of bankruptcy.  Our net worth was a horrible -$85000.  But we turned it around.

We started with a budget and built up a $1000 emergency fund.  We still have that $1000 in the bank earning interest at etrade.  We still use a budget every month.  We’ve paid off one of our cars, several credit cards and have moved a couple credit cards to 0% intro rates.  We’re nowhere near being out of the fire yet, but we are getting there.  Our one year review shows a net worth of -$58000.  An impressive increase.  It was helped by a nearly $10,000 increase in the value of our home, but still reflects the work we’ve put into our finances.

We’re on our way to financial independence and a debt free lifestyle.

Creating a Debt Plan: My Dollar Plan Reader

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One of the readers over at My Dollar Plan want’s to eliminate his debt and My Dollar Plan has opened it up to all of us to give it a go at creating a debt plan for the reader before he announces what he has/will suggest.

Here’s the basics:

The reader has approximately $14,000 in debt.

  • Personal Line: $3,500 balance @ 15% – $7,000 limit
  • Credit Card #1: $2,300 balance @ 9.6% – $5,000 limit
  • Credit Card #2: $6,600 balance @ 8.5% – $8,000 limit
  • Credit Card #3: $1,900 balance @ 18% – $2,000 limit

According to the post, he’d like to keep using the 3rd card as it gives him cash back on certain purchases. If you’ve been following the Beating Broke Rules, you’ll know how I feel about Credit Cards.

The other factors we are given are that the persons income is in the high 5 figures, so for this exercise, we’ll assume  about 75k.  He’s currently paying $210 on the personal line, $0 on the first card, $1200 on the second card, and $100 on the third card.  We don’t get anything about living expenses which makes it a little hard to nail down a very good debt plan, but we can give it a try.

We’ll use what he’s currently paying as his total income that is usable for this purpose.  He’s also got some company stock, but we won’t be using that as selling stock can sometimes carry a pretty hefty tax bill.  Sidenote: Company stock plans are great, but some thought should be given to diversifying.  That’s another article though.

Let’s get the reader started on creating a debt plan.

Current payments: $1510

As you can probably tell by the byline of this blog (The borrower is Slave to the Lender), I don’t like debt.  I especially don’t like credit card debt.  And Personal lines are not much better, but have the added benefit of not normally being as easily accessible as credit cards.  I also think that cash back cards are a waste of time.  If you miss even one payment, you’ll pay more in interest to the card company than they paid back on your purchases for the whole year.

Here’s how I would go about creating a debt plan.

Pay the minimum payment on everything but the 3rd card.  That should pay it off in just over 1 month.  Now, if you insist on using that card for the cash back, you must also insist on paying it off every month.  I suggest taking your receipts home each night and making a bill pay payment for the amount.  If you can live without the cash back on the credit card, you might look into finding a bank account that would give you a cash back on debit card purchases.

After the third card is paid off, start on the personal line.  Pay minimum payments to everything but the personal line.  With a balance of about $3400 at this point, it should take just under 3 months to pay it off.  That gets us to October.  I really don’t think, unless you can find some more disposable income, that you’ll make the November cutoff.  One way would be to sell your stock, but you should be very sure of the tax ramifications of doing so before selling it.  If you do, start with the first item here and work your way down until the money is gone.

Once we have the third card and the personal line paid off, we are left with just card 1 and card 2.  Both have similar interest rates, but the balances are different.  Card 1 has about $2300 in balance and could be paid off rather quickly, so I think that would be a good place to start.  It would take just under 2 months to pay that one off.

That leaves you with only the ~$6000 on Card 2 at the end of the year.  If you are diligent and continue paying the $1500 a month, you can have that card paid off in 4 months.

It will take longer than November unless you sell your stock, but when you are done your financial picture will be so much better for it.  The more you squeeze out of your budget (you do have one right?) now, the faster the debt gets paid off and the sooner you can start planning for your future instead of paying for your now.

Good Luck!