What about the type that gets mad at airport security lines?
I was in an airport security line recently where multiple lines were merging into one when I heard a guy say to another traveler who he thought cut in front of, “I’m in line, too!”
Clearly, he’s the type who gets mad in airport security lines.
This always puzzles me.
You know there’s going to be traffic. There’s always traffic.
You know airport security lines are chaotic.
Why do we let these things bother us?
My theory is that because we didn’t plan ahead. We didn’t check the directions before leaving the house to avoid traffic. Or, we didn’t get to the airport early enough to not stress about security lines.
The point is that you can’t stop traffic from happening just like you can’t avoid security lines at the airport.
But, with the right planning, these inconveniences don’t have to ruin your day.
What does this have to do with personal finance?
Well, traffic and security lines are unavoidable.
That doesn’t mean you have to like them. You just have to accept that they are part of life and things you can handle.
You know what else is unavoidable?
Budget busters.
What are budget busters?
Budget busters are any inconsistent expenditures, good or bad, that can derail your finances if not properly planned for.
Good budget busters might include trips, weddings, and holiday/birthday gift shopping.
Bad budget busters include unexpected car repairs, home repairs, or medical expenses.
The key with budget busters is that you need to plan ahead. That’s because even though we know budget busters will happen, we just don’t know when they will occur.
When I teach personal finance to young lawyers, this is one of the major areas of concern when it comes to budgeting. It is not uncommon for people to worry about how they’re going to pay for inconsistent, big ticket items.
Remember, budget busters don’t have to be for only “bad” things, like repairing a furnace. More on that below.
Budget busters can also be for fun things, like being a bridesmaid in your best friend’s wedding, which can easily cost you thousands of dollars.
With the proper planning, you can handle these inconsistent expenses, good or bad.
If you don’t plan ahead, budget busters will make you mad in the same way people get mad at traffic and airport security lines.
Budget busters are not unexpected expenses.
You may sometimes see budget busters referred to as “unexpected expenses.”
Nope, that’s wrong.
Budget busters may be inconsistent, but they are not unexpected.
It’s more accurate to say that budget busters are 100% expected expenses. We just don’t know exactly when they’re going to occur.
Like with traffic and lines at the airport, budget busters are inevitable. It’s up to each of us to plan ahead to minimize the inconvenience and stay on track with our finances.
I don’t make many guarantees around here. This is one I’m comfortable making:
I guarantee that each of us will face potential budget busters throughout the year.
In fact, I just experienced a potential budget buster on a cold November morning in Chicagoland.
A couple of weeks ago, on a cold November morning in Chicagoland, I woke up with a broken furnace.
It was certainly inconvenient and potentially a huge drag on my finances. The final cost to replace my furnace was more than $10,000.
As much as I didn’t enjoy this expenditure, it was not an unexpected expense. My furnace was 20-years-old. We knew it was going to need replacing at some point. It was only a matter of time.
That’s why it’s just not accurate to label replacing my furnace as an “unexpected expense.”
No, I didn’t know when my furnace was going to break. But, I knew it was going to happen eventually. Because it was already 20 years-old, I knew it was probably going to happen sooner than later.
Luckily, my wife and I had made it a priority this year to build up our emergency savings. We did not know what we would need the savings for, but we fully expected that something would pop up.
I say “luckily” because in prior years, we would have been scrambling to find the cash to replace a furnace. That’s because we had prioritized buying investment properties at the expense of funding our savings account.
That was a risk that made sense while we were growing our portfolio. Now, we’re more focused on protecting what we’ve built. Hence, prioritizing the emergency savings account.
Because we have been steadily funding our emergency savings account this year, we just moved the money over to our checking account and paid for the furnace.
We didn’t have to rely on credit cards or lines of credit to provide heat for our family.
I even made a game out of it to take a bit of the sting out of this big expense.
Plan for budget busters as line items in your Budget After Thinking.
I recommend including two separate line items for budget busters in your Budget After Thinking.
Have one line item in your Now Money category (bad budget busters) and one line item in your Life Money category (good budget busters).
You likely won’t end up spending your budget buster money every month. That’s a good thing.
The key is that each month that you don’t spend your budget buster money, transfer it to your savings account so it’s there when you need it.
This is an important step. You don’t want to let that hard-earned money sit in your checking account. Those dollars will disappear.
By transferring them to savings, those dollars will be at your disposal when needed.
Be sure to have a separate savings account for emergencies, like budget busters.
It’s a very good idea to keep your savings separate from your everyday spending. That means having a savings account and a checking account.
Of course, the most important savings account you need is an emergency savings account. This is what I used to pay for my furnace.
Ideally, you should open up a savings account at a different bank than your checking account. This helps isolate those funds so those dollars don’t disappear.
There are lots of good options for high-yield, online savings accounts. I used to bank with CapitalOne, but then they burned me and thousands of other customers. Never again.
I now use BMO Alto for my emergency savings account. They offer a good interest rate and a no frills product. Very simple and straightforward.
Don’t be mad at budget busters.
With the proper planning, you don’t have to be mad a budget busters.
Include budget busters as line items in your Budget After Thinking.
Open up an emergency savings account at a different bank than your primary checking account.
When inconsistent expenses pop up, you’re covered.
Save your frustration for traffic and security lines.
Have you dealt with budget busters in the past?
Were you prepared to deal with them? Or, do you wish you had planned better?
In this post, we’ll learn how to pay off debt on a budget. In our initial series on debt, we first looked at some scary stats about how common debt is in society.
By recognizing that debt is something that impacts nearly all of us, I hope that you stop feeling alone if your’e in debt. There’s no reason to be ashamed. You are not a bad person.
Debt is a major obstacle on the way to financial freedom. To help you stay motivated to eliminate debt, write down your version of Tiara Goals. By reminding yourself what you’re actually striving for, you’re more likely to stay on track.
When you’re faced with these inevitable temptations, take a look at your Tiara Goals. I keep my Tiara Goals in my notes section on my phone. I also have a picture on my phone of the original sheet of notebook paper I scribbled on.
All it takes is a quick glance at my most important life values to overcome whatever temptation is in front of me.
Getting out of debt is not easy. Make it easier by regularly reminding yourself what you would do with financial freedom.
2. Create a Budget After Thinking so the debt stops growing.
If you’re currently in debt, it’s crucial that you stop that debt from getting larger. Think about it. If you’re paying off $1,000 of credit card debt each month, but you’re still spending $1,200 more than you earn, your efforts will be for nothing.
Your debt is growing faster than you’re paying it off. You’re not getting any closer to being debt-free.
Once you’ve stopped the disappearing dollars and learned where your money is going each month, you can make thoughtful decisions to pay off debt on a budget.
Then, you can be confident that any money you allocate to debt will actually lower your debt balance.
3. Prioritize Later Money funds to pay off debt.
As we’ve discussed, the art of budgeting is to generate fuel for your Later Money goals. The more fuel you can generate each month, the faster you will achieve your personal finance goals.
When you’re in debt, I recommend you prioritize using your Later Money to eliminate that debt. This is especially true if you have Bad Debt, like credit card debt. Your number one money focus needs to be to eliminate that debt.
This is the key to learning how to pay off debt on a budget.
There’s a good reason to focus on paying off your Bad Debt.
The interest rate on Bad Debt is generally very high. The amount you pay in interest each month will be significantly greater than what you may reasonably expect to earn through investments.
If you only have Good Debt, like student loan debt, you have some more flexibility in whether to focus on that debt or your other investment goals. This is because Good Debt generally carries lower interest rates, so your investment returns may match or even exceed what you’re paying in interest.
Seeing your savings and investments grow while focusing on how to pay off debt on a budget can provide an emotional lift. Establishing good savings and investment habits now will also have longterm benefits that should survive your debt phase.
4. Apply our Top 10 Strategies for staying on budget.
Our Top 10 Strategies for staying on budget will help you generate more money to allocate to debt. These tips are crucial if you’re trying to learn how to pay off debt on a budget.
For example, when you see something that you might want to buy, make a note in your phone instead of buying it right away. After a couple weeks, you probably won’t even want that thing anymore. Take that money you didn’t spend and put it towards your debt.
As another example, how about playing The $500 Challenge Game? When you come in under budget that month, use the excess funds to pay down debt.
When you have debt, applying our Top 10 strategies to staying on budget can teach you something powerful. You’ll see for yourself that the emotional high of paying down debt is better than the feeling you’d get from spending that money on things you don’t care about. It’s important not to ignore these emotional wins when learning how to pay off debt on a budget.
5. Talk to your people about how to pay off debt on a budget.
Talking money is not taboo. That includes talking about our current money goals and money challenges. Of course, it includes talking about how to pay off debt on a budget.
The problem was that none of us talked about it. I think about how much stress we could have saved each other if we were just willing to talk about money like we talked about everything else. Instead, we hid our truths from each other. Even worse, we likely enabled each other’s poor spending habits.
I now know that it didn’t have to be that way. I would have been better off if I was open about it.This part still bothers me today: I also might have helped my friends facing the same challenges just by starting the conversation.
6. Track your net worth and savings rate for small wins.
Remember that your net worth grows when you reduce your liabilities, meaning debt. When we think of net worth, it’s common to focus on growing our assets. Don’t forget that reducing your debts has the same impact on your balance sheet.
For example, when tracking your net worth, eliminating $1,000 in debt is the same as an investment that grows by $1,000.
Even when you’re focused on how to pay off debt on a budget, tracking your net worth can be very motivating. Every payment you make to reduce that debt improves your net worth.
This is especially helpful if you are focused on paying off student loans or paying down a mortgage. You may not have many appreciating assets, but you can still make a positive impact on your net worth by reducing your debt.
The same logic applies to tracking your savings rate. Measure and feel good about each additional amount you dedicate to eliminating debt. The goal is to stay motivated while you pay off debt on a budget.
There are two common strategies to consider when you hope to pay off debt on a budget. These strategies are referred to as “Debt Snowball” and “Debt Avalanche.”
Debt Snowball means paying down your smallest debt balance first, regardless of interest rate. When you’ve paid off that loan completely, you then move to the next smallest balance, again regardless of interest rate.
Debt Snowball is ideal for people that are motivated by the emotional wins that come with eliminating a loan completely, even if it costs more money in interest in the long run.
Debt Avalanche means you pay down the debt that has the highest interest rate first, regardless of the balance. Once that debt is gone, you move to the loan with the next highest interest rate.
Debt Avalanche is for people who would prefer to pay less overall interest, even if it will take longer to pay off a single loan and receive the emotional win.
I discussed the pros and cons of each strategy here. Some people will prefer the emotional wins of the Debt Snowball method, while others will prefer the mathematical advantage of the Debt Avalanche method.
Personally, I use the Debt Snowball method.
I value the emotional wins of eliminating a debt entirely, even if it ends up costing me more in the long run. I am currently applying the Debt Snowball method to pay off HELOC debt.
I’ve experienced firsthand that our money choices have more to do with emotions than they do math. If you prefer to play it strictly by the numbers, I completely understand.
The key is that whichever strategy you pick, stick with it. You’ll save yourself a lot of unnecessary mental gymnastics by choosing one approach and then moving on.
One word of caution: whichever method you choose, be sure to always pay the minimum on all of your loans. Otherwise, you’ll be in violation of your loan terms and face devastating penalties.
The idea with either of these methods is to allocate whatever funds remain to the single loan you have prioritized after paying the minimum on all loans first.
8. Think about loan consolidation or balance transfers.
Whether you have credit card debt, student loan debt, or even mortgage debt, you may have the option to consolidate each type of loan into a single loan. If you do your homework, you should end up with a lower overall interest rate and have only one loan payment to make each month.
If you choose to go this route, make sure you fully understand the fine print involved.
For example, if you’re thinking about consolidating your student loans, you’ll end up sacrificing certain loan forgiveness provisions that accompany federal loans.
The same caveat applies when considering a credit card balance transfer. A balance transfer is when you move the balance from one credit card to a different credit card with a lower interest rate. Most major credit cards accept balance transfers from other banks’ credit cards.
The main reason to consider a balance transfer is if the card you are transferring into carries a significantly lower interest rate than your current card. In some instances, you may even qualify for a promotional rate with no interest charged for a limited period of time.
I used balance transfers when I was focused on eliminating credit card debt at the beginning of my career. I did my homework and found a card that was advertising 0% interest for 12 months with no balance transfer fees. That meant that for an entire year, I paid no interest. Every payment I made went directly to lowering my overall debt.
If you’re considering a balance transfer, be mindful that there are usually upfront fees involved, usually around 3%. That fee may end up cancelling out any benefit from doing the transfer in the first place.
9. Get a side hustle to help pay off debt on a budget.
At the end of the day, there are really only two ways to more quickly pay off debt on a budget: spend less money and/or make more money.
We already talked about creating a Budget After Thinking to help on the spending side.
If you really want to get rid of your debt faster, earning more money and the same time you’re spending less money is a dominate combination.
If you take on a side hustle, you can use every dollar you earn to pay off debt. Since this is new money you’re earning, you shouldn’t need it to fund your Now Money or Life Money.
Avoid the temptation of using that money on things you don’t really want anyways. Think about how much faster that debt will disappear if you’re able to throw additional money at it each month.
If you’re not ready for a side hustle, the same logic applies anytime you earn a bonus or commission at your primary job. Put that money to good use by paying down your debt.
10. Don’t let yourself fall backwards while you pay off debt on a budget.
When you do succeed in eliminating a debt, don’t let yourself fall back into bad habits. It’s hard to pay off a debt. It takes time. It takes patience and discipline.
Don’t let it all be for nothing.
When you pay off a loan, celebrate that accomplishment!
Be proud of yourself and let that good feeling motivate you to continue on your journey towards financial freedom.
Before you know it, debt will be part of your past life. You can shift all your attention to the opportunities that comes next for you and your family.
Let us know in the comments below:
Have you used any of these strategies to pay off debt on a budget?
What about any other strategies to pay off debt on a budget that have worked for you?
Let’s turn this simple question into a hypothetical scenario.
It’s time to learn one final (for now) important personal finance tracking metric, known as “saving rate.”
Congratulations on your raise!
Let’s say you’ve been at your job for a few years. Your current salary is $100,000.
It’s salary review time, and you set up a meeting with your boss. You want to make sure she remembers all your major contributions from the past year.
Prior to the meeting, you send her a letter setting forth your top accomplishments. It’s a hard letter to write. It doesn’t feel like a normal thing to have to brag about yourself.
You remember seeing a quote somewhere, “If you don’t advocate for yourself, nobody else will.” You push on and send your boss the letter.
On the day of your meeting, you’re nervous walking into your boss’ office. Why did I ask for this? She’s going to be so annoyed.
Before you even sit down, she puts your mind at ease. Your boss has a welcoming smile on her face.
She immediately thanks you for your thoughtful letter. She appreciates the reminder of all your accomplishments throughout the year.
Your boss tells you that you’ve always been a valuable member of the team. She thanks you again for reminding here of some of the specific projects you worked on that year.
It’s not a long conversation. Before you go, she asks what else the company can do to enhance your work experience. You walk out of her office feeling like a valuable member of the team.
You’re happy that you initiated the meeting, even though you didn’t enjoy the process.
A couple of weeks later, you receive an email that your salary is increasing by $20,000.
You couldn’t be happier. You earned it.
Wait, a raise?
Work continues as normal the rest of the week. By the time your next paycheck hits your bank account, you sort of forgot that you’re now making more money.
After taxes and retirement contributions, your biweekly (every 2 weeks) paycheck is now for roughly $538 more. That comes out to $1,166 more money per month, which of course, is a very good thing.
But, you need to figure out what you’re going to do with that money.
Ideally, you’ll have a plan in place before you receive the money. Whether it’s a raise, a bonus, or you switch jobs and earn a higher salary, the thought process remains the same.
Thinking about what to do with this new money is what I’m getting at when I ask, “What would you do right now with $20,000?”
No, it’s not coming in one lump sump payment.
Fine, you have to pay taxes on the $20,000 so it’s more like $14,000 in new money.
The point of the question doesn’t change. What are you going to do with this money?
3 options for what to do when you earn more money.
You now have more income coming in each month. Let’s talk through some of the options on what you can choose to do with that excess money.
Option 2: You tell yourself, “Man, I’m flush!” You start looking for a nicer apartment. And, you upgrade your plane ticket on your upcoming trip. You stop taking the train to work and instead opt for Ubers. Congratulations, you’ve become the real life, really lost boy.
I also find it most useful to express your saving rate as a percentage. To see your saving rate percentage, all you need to do is multiply your saving rate by 100.
Moving forward, when I refer to saving rate, I will be talking about your saving rate percentage. It’s more informative to see what percentage of your money you are saving, rather than an amount with no context.
What I mean is this: if someone asked me if saving $10,000 per year was a good target, I wouldn’t be able to comment with more context.
If that person was making $75,000 per year, I would say that seems pretty good. That’s a saving rate of more than 13%.
If someone told me they were making $750,000 per year, and only saving $10,000, I would recommend that person revisit their Budget After Thinking. That’s a saving rate of only 1.3%.
Follow these tips for calculating your saving rate.
Just like we talked about when creating your budget, don’t overcomplicate this process. Here are some suggestions to help you easily calculate your saving rate:
When you calculate your saving rate, be sure to use your take-home pay for “Money Earned.” This means the amount of money that hits your bank account after taxes and retirement contributions.
This next part gets a little bit tricky to explain, but it’s important.
If you get paid biweekly (every other week), that means you will receive 26 paychecks every year (52 weeks / 2 = 26). If you are paid twice per month, like on the 1st and 15th of every month, you only receive 24 paychecks.
OK, so what?
To determine your monthly take-home pay so you can calculate your saving rate, you need to know the amount you earn for the whole year.
To figure out how much you earn in a full year, multiply the amount you receive in one paycheck by 26 (or 24). That’s your annual take home pay.
Then, to calculate how much you earn per month, divide your annual take home pay by 12. This is the amount you’re going to use for “Money Earned.”
For “Money Saved,” include all of the money you are putting towards your Later Money goals each month (except your retirement contributions through work).
I know it’s called “saving rate,” but for this purpose, include all your Later Money in the saving rate equation.
Of course, we know that “saving” is different from “investing.” Saving is also different than paying down debt or any other personal financial goal you’ve set.
It doesn’t matter. When calculating your saving rate, your goal is to see what percentage of your take-home pay is fueling our Later Money goals.
When it comes down to it, there are really only two ways to improve your saving rate.
You can spend less, and save more, of the money you’re currently making.
You can make more money and save most of that money, all while keeping your expenses the same.
Combining those two ideas is even better. Like we just said, make more money, spend about the same.
Use the excess money you make to fuel your Later Money goals.
If you can do that, your saving rate and your net worth will steadily climb. You’ll experience that your Later Money goals are closer to becoming reality than you think.
Let’s do the saving rate math together.
Now that we know what our saving rate is and why it’s such a useful metric, let’s revisit our $20,000 raise to do some math together.
Going back to our hypothetical, you were making $100,000 before your raise. Let’s assume that your take home pay was $70,000 per year after taxes and retirement plan contributions.
Let’s also assume you were putting $1,000 per month towards your Later Money goals.
Using our saving rate percentage formulas above, we see that:
Money Earned = $5,833 per month ($70,000 / 12)
Money Saved = $1,000 per month
Saving Rate = $1,000 / $5,833 = .17
Saving Rate Percentage = 17%
17% of your take home pay to fuel your Later Money goals is great!
Now, let’s see what happens if you add your entire raise to fuel your Later Money goals.
Earlier, we assumed that after taxes and retirement contributions, your take home pay increased by roughly $1,166 per month. With your raise, your annual take home pay has now climbed to $84,000, or $7,000 per month.
Look what happens to your saving rate percentage when you add the full $1,166 to Money Saved (instead of spending it)
Money Earned = $7,000 per month ($84,000 / 12)
Money Saved = $2,166 per month
Saving Rate = .31
Saving Rate Percentage = 31%
You more than doubled your monthly savings contributions and improved your saving rate to 31%!
Think about how much more quickly you can reach your goals by planning out this one decision.
