In Monthly Expenses

    Yeah, but budgeting is easy when you have plenty of money…

    So, my post last week sparked a few comments. One of those comments was that it’s easy to budget if you have plenty of money, but that most people in debt don’t have enough to cover their basic needs. My experience is the opposite. Budgeting is more difficult in a comfortable situation because the consequences of spending are noticed less. I think it’s much easier to budget if you’re forced to by your sparse income – and once you budget, you’ll find you have money left over to start paying down any debt you may have!

    ANY adult with the ability to work full-time can cover their basic needs. I don’t care who you are. You can be a high-school dropout working as a janitor at the high-school you dropped out from and you will still earn enough money to live and support a family. It might not be glamorous, but it can be done, and I’ll show you how.

    As I’ve mentioned, I’ve been blessed. I have enough to pay my loans and live within the somewhat generous budget we have established for our family. That wasn’t always the case. When we had very little income we were forced to live within a budget because a single frivolous expense would make it impossible for us to pay rent, get to work, or accomplish some other equally important task.

    Last week I shared our family budget. In that post I mentioned that we could trim fat if we had to. This week I’m taking it a step further. I’ve evaluated my budget, done some math, and created a model for how tight I could trim my expenses (like if I lost my job, or some other tragic event occurred).

    Below is the same spreadsheet as last week but with a new number: my “bare bones” number. If I was in dire straits, this bare bones number is how I would spend my money (and, actually, it’s a good approximation for how I did spend my money when we were in a desperate situation). I’ve also included a description of what I cut from my actual budget to arrive at my bare bones budget.

    Category Monthly Budget Bare Bones Budget Bare Bones Description
    Utilities  $                 215.99 $                 260.99 Added internet and phone which are currently business expenses.
    Food1  $                 630.00 $                 450.00 I removed all “eating out” and a few other minor frivolities.
    Fuel & Vehicle Maintenance  $                 184.00 $                   96.00 We could downsize to one car and this number reflects that.
    Household Items & Miscellaneous  $                 392.95 $                 202.95 Removed allowance and babysitting.
    Annual Subscriptions & Memberships  $                 107.90 $                   61.70 Removed all unnecessary expenses and memberships.
    Vacations & Gifts  $                 265.00 $                     0.00 Vacations would be suspended and we’d get creative for gifts.
    Charitable Giving  $                 556.40 $                     0.00 Donations would be drastically reduced.
    Living Expenses Subtotal  $             2,352.24 $             1,071.64 Wow! That’s a HUGE difference.
    Housing  $             1,368.74 $                 950.00 Move to a smaller home. This is for a 3-bedroom apartment in my area.
    Housing Subtotal  $             1,368.74 $                 950.00
    Personal Expenses Subtotal  $             3,720.98 $              2,021.64 My definition of basic needs costs $24,000/yr.

     

    If you’re an adult, and you make less than $24,000 a year, you’re doing it wrong. Stop, take a moment to reevaluate your life, and start applying for jobs. Unskilled laborers make more than $35,000 a year. If you don’t believe me go to indeed.com, search “unskilled labor” and filter by “full-time.” This is the bottom rung of employment in our society.

    But, being intelligent people who are motivated to work hard, you can (and will) do better than this. If you have a college degree, there are any number of jobs you can get that will pay you $45,000 a year. And, if you have a professional degree, you can find a job making at least $65,000 a year.

    So, let’s say you’re an average American. You have a modest mortgage that costs you about the same amount monthly as my bare-bones budget, you have $16,750 in credit card debt, $29,000 in car loans and $50,000 in student loans.2 Can you escape your situation? YES!

    If you live on $24,000 a year and you make $45,000 a year (assuming that $50,000 earned you an undergraduate degree), that gives you a surplus of $21,000 a year (assuming you have 3 kids like me and between credits and tax rates you pay very little or no taxes). What shall we do with that surplus?

    This being a blog primarily about student loans, let’s start with those. Let’s say you refinance your $50,000 in loans at 4.5% and are satisfied with a ten-year repayment. Your monthly payment will be $518.19. This leaves you with ~$1,231.81 a month to pay down your credit card balance. If you are diligent in putting all of this remainder towards your credit card debt, that $16,750 will be gone in 16 months (assuming a terrible 18.5% interest rate). Then you’ll be able to put all of your surplus towards student loans! If you began putting all of your surplus towards student loans at month 17, you will have all of your loans paid off by month 42. That’s only 3 ½ years of living poorly to have the rest of your life to live like a king! Would it suck? Yes. Would it be worth it? That’s for you to decide.

    This brings me to my last point. How much money you make really doesn’t ma… WAIT!!!

    I forgot car loans!

    No, I really didn’t. A car loan is almost never necessary. Sell your financed car, use the money to pay off your loan, and either buy a cheap and reliable used car, a bus pass, a bike, or just walk.

    There are plenty of alternatives to financing an expensive car.

    As I was saying. How much money you make really doesn’t matter. All that matters is how you choose to spend the money you do have. How we spend our money comes down to what we all personally value. I value relationships with my wife and children and paying off my student loans. That’s why, in my budget, I’ve allocated money for dates, excursions and vacations. I’ve done the math and decided that I’m willing to spend another year getting out of debt to redirect money to those activities.

    When someone says they “can’t get out of debt” what they’re really saying is that they value their current lifestyle more than financial freedom. That’s ok if they do. But, now you know exactly how to tell them what their alternatives are. There are always going to be reasons given for why a budget like the above won’t work for someone in their specific situation. However, the benefits of financial freedom are worth making your best attempt.

    Next week we’ll talk about something fun. Windfalls!

    1 For a family of five, if you earn less than $37,000 a year you’re likely eligible for full SNAP benefits. If you need assistance with food, check out the USDA’s SNAP eligibility page. If your employer doesn’t cover health insurance and your income is $45,000 there are some excellent options available. I was able to find good healthcare plans for $1,050 per year through healthcare.gov for a family of five.

    2 Source: https://www.nerdwallet.com/blog/average-credit-card-debt-household/