Financial Fitness: An Update

I'm happy to report that we are ahead of schedule with our debt payoff plan. Pending any major catastrophes, we will be consumer debt-free by April, exceeding our goal to have all unsecured debt paid off by May of 2012!

Here are is little chart to visualize the progress that we've made:

 If you're interested to see how we did it, reference blog posts one, two, three, and four.

Note: This is a series on the blog to share our path to financial fitness. We are no experts in personal finance. We are, however, on our way to becoming smart{er} consumers. 



xoxo,

PJ

Financial Fitness: Debt

As discussed here, when Hubby and I moved in with family, our focus was to pay off all of our consumer debt within our timeframe of 12 months. We set a specific dollar amount goal to have paid off by May of 2012. For this installment of "financial fitness", we're on to discussing our debt payoff plan.

Step One AKA “the eye-opener”: We took stock of all of our debts from various places including general credit card debt, department stores, medical statements, etc. We created a spreadsheet with all of our debts and included the following:

• The debt source {name of department store, credit card, etc.}


• Current balance


• Interest rate {if promotional rate, the date that the promotional rate ends}


• Minimum payment due

Step Two: We then organized our debt from smallest to biggest. We did not pay attention to the interest rate. This is a philosophy I was very skeptical about when we first started. I thought it would make the most sense to pay off higher interest rate debts first. However, it proved successful as we maintained our motivation to pay off debt. The results are fast, as it is easier to knock out the lower balance debts.

Here is an example of debts from least to greatest including balance, interest, and minimum payment amounts:

Debt	Balance	Interest	Minimum
One	$350.00	11.00%	$35.00
Two	$500.00	7.00%	$30.00
Three	$500.00	10.00%	$40.00
Four	$700.00	7.00%	$35.00
Five	$700.00	10.00%	$30.00
Six	$850.00	7.90%	$35.00
Seven	$4,000.00	9.99%	$30.00
Total Debt	$7,600.00		$235.00

Note: To add all the columns together, simply apply the "sum" formula to give a total for all selected columns.

Step Three: Now that debts are arranged from least to greatest, we tallied up the minimum payments for each card. Then, we took the amount that we set for debt payments from our budget, minus the minimum payments. This gave us the extra amount to apply to our debt. It ends up looking like this {this example uses the debt breakdown above}:

$900 {debt budget}

- $235 {minimum payments}

= $665 {extra debt payment}

Step Four: We then add the “extra” to the minimum payment of the first debt {the smallest debt}. Repeat every month to knock out debt from smallest to largest. This creates a “rolling” effect that accelerates the debt payment process.

An example of rolling debt payments:

Debt	Minimum	Extra	Revised
One	$35.00	665	$695.00
Two	$30.00	665 + 35	$730.00
Three	$40.00	665 + 30 + 35	$770.00

If “revised” amount is greater than debt owed, simply apply to the next debt. As debts are paid off, we continue to roll the minimum payments from the previous debt to achieve a greater revised payment for the current debt.

{Rinse. Repeat Step Four. Every Month.}

Note: This is a series on the blog to share our path to financial fitness. We are no experts in personal finance. We are, however, on our way to becoming smart{er} consumers.

Financial Fitness: The "B" Word

It would be entirely dishonest to say that setting up a budget is “fun”. It is, however, completely necessary. Over the last few months, I have dreaded our bi-monthly budgeting less as we have more control over where our money goes and how it’s being spent.  Like everyone says {and I agree}: It’s important to know where your money goes. Setting up a budget allows you to tell your money where you want it to go.

Over the last few months, Hubby and I have spent hours {literally} going over our budget. Every two weeks, we spend about an hour discussing when, where, and how we will spend. I don't anticipate it will always take that long, but for now, it's a discipline that we have embraced. Every two weeks we go through the following steps:

 Step One: For each paycheck, we start with our income and gradually work our way through the next two weeks making a list of all of the bills that are due {mobile phone, internet, storage unit, etc.} until we have reached the next paycheck. Side bar: I find that it works best to do this every two weeks instead of just once a month. It keeps us accountable to each other and very motivated to complete our goals. Plus, our paycycle is every two weeks, so it just makes sense to follow it.

An example of our bi-monthly budget for bills:

• Mobile Phone Bill: $180


• Storage: $120


• Netflix: $7.99

Step Two: After we have paid all bills {or simply marked that they will be debited}, we make a list of all of the things that are coming up: occasions to purchase gifts, dinner dates, activities, etc. We make a list and prioritize what we need to have available.

An example of irregular occasions:

• Movie night: $25


• Friend’s birthday party: $30


• Family birthday gift: $25


• Bridesmaid dress: $120

Step Three: We have a debt payoff goal amount {to be discussed next time} which we have broken it down into 12 monthly goals. Each time we sit down to do the budget, we have a specific amount of money earmarked for debt-only payments. This is a handy reminder that our end goal is still to have no debt.

 An example of our bi-monthly budget for debt:

• Student Loan: $290


• Consumer Debt: $900

Step Four: We allocate our remaining expenses into the following categories and take out cash to make all purchases. Cash has proven a very effective way to hold us accountable to our spending and to stay within our budget. We have an accordion file with various sections labeled {clothes, groceries, dining out, etc.} where we keep our cash. If there are certain purchases we would rather make with a debit card {fuel, online shopping, etc.}, we simply leave the amount in our checking account, and indicate on our budget worksheet. Side Note: We track our cash withdrawals from previous weeks to give us an idea of what we should withdrawal for each category. We adjust as necessary. For example: if there’s a week where we want to dine out more than cook meals at home, we will adjust our grocery budget to be smaller and our dining out budget to be larger. We remain flexible with our spending budget to adjust categories accordingly.

 An example of our bi-monthly budget for spending:   

• Groceries: $140 (cash)


• Dining Out: $80 (cash)


• Target: $40 (cash)


• Haircut: $20 (cash)


• Lennon: $40 (cash)


• Transportation: $40 (cash)


• Gifts: $20 (cash)


• PJ: $20 (cash)


• Hubby: $20 (cash)


• Fuel: $20

{Rinse. Repeat. Every Two Weeks.}

So there it is, folks: our budgeting steps. Do you and your partner have a monthly or bi-monthly budget? I'm interested to know how others tackle the "b" word.

Note: This is a series on the blog to share our path to financial fitness. We are no experts in personal finance. We are, however, on our way to becoming smart{er} consumers.