Posts Tagged ‘Baby Steps’

Baby Steps: Baby Emergency Fund

December 28th, 2008 No comments

An integral part of your plan to get out of debt is your emergency fund.  Life is going to throw curve balls at you, and, no matter how well you plan, expenses are going to come up that you either don’t have enough money set aside for, or didn’t even consider!

Most people seem to use credit cards for these types of expenses, but that will leave you with a number of problems:

  • Credit cards are evil.
  • You might be tempted to run up the balance on the card and not have enough for emergencies.
  • You are going to pay interest, why not have the money and possibly receive interest?
  • Credit card companies are lowering credit limits, increasing interest rates, and even closing accounts due to the currently in-progress monetary apocalypse.  Will that card be available when you need it?

Let’s face it, most people who are in debt wouldn’t be without credit cards.  They make spending too easy.

So, once you get your bills current, using whatever is left from your budgeted items (you do have a budget already, right?), start socking that money away until you get $1,000.  You could go lower, but a grand is going to cover most things.  If you have a deductible on your car insurance, make sure your emergency fund is at least as much as the deductible.

It might be hard to imagine, but knowing you have that money tucked away will be ridiculously comforting.  Now don’t touch it unless it is an emergency!  This isn’t going to be the end of it, this is just the first stage of your emergency fund, enough to tide you over until you retire all of your debt.  Once that is done, you are going to work on building up three to six months of expenses into a full-fledged emergency fund.

Baby Steps: The Envelope System

December 22nd, 2008 No comments

You are going to either love or hate the envelope system.  All of your spending you can possibly do with cash, you use envelopes.  The idea is that you know exactly how much money you have to spend on a category, and you know exactly how much is left.  It’s going to make you think.  Do you really need that item?  If you buy those Twinkies, will you have enough for milk left over?

Most of our envelopes we fund for two weeks (the length of our pay period,) but the groceries envelope we fund for a week at a time.  We found it just too easy to overspend the first week and then be worried the next week about having enough to purchase everything we need.

If you use my sample budget, the amount for your envelopes will not only be totaled, it will also do a breakdown of what denominations you need to fill each envelope correctly.  When my wife and I first started, we had trouble getting the right amount for each envelope, especially while tweaking the budget, so I did a bunch of simple formulas to figure out what bills went into each envelope and then totaled them in a box at the bottom of the budget.  We cut that box out and hand it to the bank teller with our cash check, which seems to please them, so it’s a double bonus!

Hundreds 1
Cash Fifties 2
for Twenties 5
Envelopes Tens 3
$336 Fives 1
Ones 1

Even if you don’t like the idea of the envelope system, give it a try.  Adjust your amounts or what you put in envelopes.  After the price of gas got up to almost $5/gallon, we quit using the gas envelope and just tracked our gas purchases via a virtual envelope, using a savings goal in Quicken.  I drive about 120 miles a day round trip, and I felt the amounts were getting unmanageable, not to mention tempting to misuse.

Baby Steps: Make A Budget

December 19th, 2008 No comments

If you don’t have a budget, you will never get out of debt.  Just winging it on how much you spend on things doesn’t work — otherwise you probably wouldn’t be in debt right now.  And you will not get your budget right the first time, or likely the second or third.  It will be frustrating, but the general consensus is that it takes close to three months to get a good, working budget.

Pencil and paper, or on the computer, either is fine.  I did our first rough draft on paper and after playing with it a bit, put it into a spreadsheet.  Google Docs is pretty good for this, as you have access to it anywhere and can share it with your spouse.

I set ours up with the following sections (borrowed from Dave Ramsey) :

  • Charity
  • Savings
  • Housing
  • Utilities
  • Food
  • Transportation
  • Medical/Health
  • Personal
  • Recreation
  • Debts

Under each of these sections you will want to have entries for specific things.  For instance, under food, I have Groceries and Eating Out.

Here is a sample copy of the budget sheet I use: Budget Sheet

Using this sheet, you get a running tab on how much you have left to budget, or have to cut.  There’s likely lines you won’t use (like domain names,) which you can rename to be something you would need.

Account for every dollar.  You are going to be wrong to start, but it’s better to not have a slush fund to pull from, except your blow money, which is what the name says; money you can just blow.  With extra money, you will be tempted to overspend your categories, and probably by more than you have left over.

Next up: The envelopes.

Baby Steps: No More Debt

December 12th, 2008 No comments

When we started Dave Ramsey, I think we were ready for not creating any more debt.  Even though we did not have a tremendous amount (we had demonstrated pretty well that we couldn’t handle it, so we weren’t offered much credit,) we were at the point where we realized that debt wasn’t bringing happiness, it was only making us miserable worrying about paying it.

There was nothing out there we had to have.  We had a van for transportation, and it ran most of the time.  We had shelter, even if the roof on the back leaks, and we were all healthy.  Even though I really wanted a new computer, the current one worked fine.  I probably could have justified buying a new one seeing as I used it for my work at home job, but I didn’t.  My wife’s laptop (which we financed — and are still paying for!) is broken (and still not paid for!) and she would really like a new one, but it isn’t critical to our livelihood; she can use mine or one of the kids.

It wasn’t always this way, and I think growing older helps.  At twenty, if someone had offered to finance a new computer for me , I would have taken it without a second thought.  I was one of those guys that got a credit card my freshman year in college and promptly filled it up buying Christmas presents for everyone, even though my part-time job barely covered my car payment, insurance, and gas.  Why live without what I want today, if I can pay for it tomorrow (and the next day, and the next day, and the next…)

The company I work for was also acquired by another, bigger company around this time, and I think the reality that being laid off was a possibility sank in.  We had nothing to live on if I lost my job.

So a definite, visible, change in behavior was called for, and quick.