Monday, July 30, 2012

Money Matters

Designing, implementing and sticking to a budget has been weighing heavy on me the last few months. We recently decided to begin the process to purchase our first house, so budgeting has become increasingly important. Here's the steps I took to design our budget and some of the tips I learned along the way.

**Note: I am not a financial planner and anything you see in this post should not be taken as professional advice. This has been and continues to be a learning experience, so it's not perfect, but I've definitely made some progress.**

I created this budget with the goal to be a combination of paying down our one major credit card while simultaneously saving for a down payment. Here's what I did:

1. List out what payments you make every month.
  • Make a list of every bill you pay. Be sure to include bills that you only pay quarterly, bi-annually, annually, etc. 
  • Categorize each payment as "debt" or "bill". These are the labels I use, but use whatever works for you, just make sure you can distinguish between what's accruing interest and what you simply pay month to month.
    • Example: credit cards, car payments and student loans are all debt. Gas, electricity, insurance, cable/internet are all bills.
2. Figure out how much you owe. This step is probably the scariest and most stressful, but it's also one of the most important.
  • Take everything that you labeled as a bill in step 1 and put it to the side
  • Take everything you labeled as debt and go look up and write down the following:
    • Current balance
    • Interest rate
      • If you bought something at 0% interest for X months, be sure to write down when the 0% ends AND what your interest rate will be after that point.
    • Due date
    • Minimum monthly payment
  • Take a deep, calming breath and add up your current balances. 
  • Take a deep, calming breath.
3. Figure out how much you should (can) pay on each debt per month. This is by far the longest and probably the most complicated step, but it's the major component in paying off your debt.
  • Organize your debt starting with the highest interest rate. Your goal should be to pay this off the quickest.
    • If something was bought with 0% for X months, set that aside, but organize by when the 0% ends
    • If something with 0% ends within the year, I suggest putting that before anything else to make sure you pay it off before the 0% ends. Generally the true interest rate on deals like this are outrageous, so you want to avoid them like the plague.
  • Grab a calculator
Source
  • For any debt that has a deadline (5 year car loan, 12 months no interest, 15 year mortgage, etc.), divide the current balance by the number of payment periods left. Write this amount down for each one. 
    • Example: if you owe $12,000 on a car and have 24 months of payments left, you should be making $500 payments each month.
    • This should be your minimum payment. This will ensure that you have your balance paid off by the time the deadline rolls around so you don't incur any penalties and so you don't have to worry about making double or even triple payments as the deadline approaches.
  • For any debt that doesn't have a specific deadline (credit card, some student loans, etc.), pick a deadline. Decide when you would ideally like to have that balance paid off. Calculate the number of payment periods between now and then. Divide your balance by that number. 
    • Example: if you owe $1,200 on your credit card and want to pay it off in the next 6 months, you should be making $200 payments per month.
    • This should be your goal for your actual minimum payment per month. Try your hardest to pay this amount each month, not just the amount your statement says
    • If your minimum payment is higher than this amount, always pay at least your minimum payment. You may also want to rethink the deadline you set for yourself.
  • Remember that on top of your debt payments, you also have bill payments to make every month. You will need to take into account your average payments for these per month
    • Don't forget those non monthly bills! Make sure you account for the amount you'll need to set aside each month.
      • Example: If you pay $75 for trash services every 3 months, you'll need to set aside $25 a month for it.
    • Don't forget other costs: groceries, gasoline, entertainment, shopping, etc. Figure out how much on average you do or want to spend on each of those costs as well.
  • Figure out how much you want to save each month. Decide if you want to save a flat amount or a percentage of your income. Decide the schedule you want to use (monthly savings deposits, weekly, etc.) 
Source
  • Write down all of the payment amounts you've just calculated and add them up. If that total number falls under your total monthly income, great!
    • If the total is above your monthly income, start by cutting back on the amount you budgeted for groceries, entertainment, etc. This may be difficult, but no one said budgeting would be easy!
    • Once you've cut back on your flexible budget, recalculate your payment totals. Still over? Decide if you're more concerned with savings or paying down your debt. Then adjust the less imperative category to lower your total.
    • Keep adjusting until you have a number under your total monthly income. 
    • Make sure you ALWAYS pay at least your minimum payments! 
Confused yet? 

Source

Yes, it's a bit complicated, but tomorrow I'll show you how I keep track of it all.
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