In the business world there is a saying I've heard many times. When a company is starting a new sales promotion they often ask if the new discounts or the new sales training or the new program will "move the needle?" That is, will it make things better? Well, how we move our financial needle is to get on a budget.
So what does a budget look like? It can look like all sorts of different things. Some people get paid by the hour and get 40 hours a week. Some regularly get overtime and some get no work when it rains. Some of us are on salary regardless of how much we work and some of us only get paid our commission if we sell something. Budgets will look different for different people.
We can give you a starting point though. I’ll also give you another good reason to do a budget if you’ve got creditors calling. Those collection agents can be unnerving. They can wind you up. You get tense talking to them or avoiding them. You want to do anything you can to shut them up. So some people, LOTS of people actually, will send in a payment on a late credit card BEFORE they pay their electric bill. YIKES!!
The starting point is to pay for the basics first. First and foremost is YOU Incorporated. I’m a big, big fan of paying yourself first. You put aside 10% for the church (5% local/5% to your choice charity) and the second 10% you put aside for you, your family, and your future. Call it an emergency fund, savings, a rainy day account, whatever you will, but put it aside. We’ll be using it now and then along the way, but for now it is yours! However much or little you make save the second 10%!
Now here some people are going to ask if all this tithing and saving another ten percent is before or after taxes. I’m going to side with the talk show host again here and say, “Yes.” I don’t care if it is before or after taxes. So few people actually tithe and so few people actually save that if you do it before tax or after tax you are doing more than most. By the way do you know what the word tithe means? The literal meaning is a “tenth”. The word tithe is actually older than the word tenth. In fact it was the word tenth. It became so “branded” by the church as to be what your were supposed to give to them the word “tenth” had to be created so people would know you were talking about that bit after the “ninth” instead of what you gave to the church.
So you’ve done away with 20% of your income. You already owe lots of people money. You haven’t bought groceries or paid the light bill. You’ve got to be wondering what in the heck I’m thinking. Well, we are prioritizing your spending. First pay God, then pay the family, then pay the bills. Which bills get paid first? Let’s start with the basics. How much do you need for groceries? Then let’s look at the rent or house payment. How much is your electric bill and other utilities ? How much do you really need for clothing, hair care, medical expenses, etc.? What about insurance? Cover the essentials. The debts are not the essentials unless you owe Guido and Uncle Vinny.
Especially, if you are on commission or are paid hourly and don’t know how many hours you will regularly have prioritizing your bill paying is an absolute necessity. It’s much better to have someone calling about a Master Card balance than to be foreclosed on. It’s much better to have someone pestering you about your Visa card payment than to not have groceries on the table. When those people are calling and getting you all upset and emotional your reaction is to pay them something, anything to get them to shut up. Your budget steadies you, guides you to keep going the right direction when the storm is blowing you off course.
Now let’s look at what’s left of your income. Where is it…there’s not much left is there? You’ve given to satisfy your soul. You’ve saved to prepare yourself and your family for the future. You have paid for the necessities of life. Now you’ve got to work on the debts.
What you are going to do to pay off your debts is called a debt snowball. It is a proven way to work through your debts in a way that allows you to see that you are making progress and it reinforces your decision to get out of debt. It’s important that you see progress. If you don’t see signs of progress it is easy to get discouraged. If you get discouraged it is going to be more likely that you aren’t going to stick to your budget. If you don’t stick to your budget you are going to pay out your hard earned money in ways that don’t benefit you the most.
When you make a snow ball and you roll it down a hill what happens? The ball get’s bigger and bigger and gains momentum. Soon the ball is huge and you are at the bottom of the hill. That’s what we want to do with your debt. Start small and finish big. List your debts in order of size from the smallest debt to the largest debt. You might have credit card debt…if you are normal you might have several credit cards with balances. List them smallest balance to largest. You might have a student loan. It could be you borrowed some money from a family member. You may have a home equity line of credit. List them all.
I sat down with one lady who was afraid she was going to be foreclosed on asked her how much debt she had. In the beginning she told me she only had two debts outstanding other than her house she hadn’t paid on in nine months. As we started listing the debts the list grew and grew. Before we were done she had NINE debts she owed…plus the house she hadn’t paid on in nine months. This is not a time to fool yourself! List them all. Small debts, large debts, official debts with lots of interest and small debts with no interest at all. You borrowed all the money and now it is time to pay the piper!
So you’ve got your debts listed smallest to largest. Now look at the minimum payments on each. That’s what you are going to pay on each one of them…except for the smallest. Whatever extra you can scrape together you are going to pay towards the smallest debt. The next month you are going to do the same thing. Pay minimums on all the debts…except for the smallest. Whatever extra you can scrape together you are going to pay towards the smallest debt. The next month you are going to do the same thing. Pay minimums on all the debts…except for the smallest. Whatever extra you can scrape together you are going to pay towards the smallest debt.
Soon the smallest debt will be paid off. Then you will have freed up the minimum payment that you were making on the smallest debt. Add that to the next smallest debt plus whatever else you can scrape together and apply it towards your next smallest debt. What are you going to do next month? You are going to pay minimums on all the debts…except for the smallest. Whatever extra you can scrape together you are going to pay towards the smallest debt.
I hope you are getting the idea. Let’s make a pretty chart for the book so you can see how that might look. Notice we haven’t listed the debts in order of interest rate. We have not listed them in order of minimum payment. We simply listed them smallest to largest.
Now let's see what happens...
Take a look at month four and five. On month five the last payment was made to the parents for the $150 loan. That loan is gone. You have a victory. You have now gone from eight debts to seven! Moreover you relationship with your parents is probably improved because you have paid them back. Now look at month number five. All that was added to the payment on the gas card was the minimum payment to the parents. Paying off the parents allows you to make a larger payment to the next debt. Let’s take a look and see where our balances are now on our smaller loans.
If you notice our minimum payment on our loan to our parents was $10. Our minimum payment to the Gas card is $20. So from now on the minimum we will be paying on our Gas card will be….$30. We roll the minimum from the previous debt into the minimum of the next debt. Then we will add anything else we can scrape together. Notice in some months we were able to pay more than other months. That’s just reality. Month 2 our imaginary couple was able to pay $60! Month 3 was tighter and they were only able to pay $40. Don’t worry about it!You now have a plan. You have a budget. You have priorities and you are on your way to building a secure financial base for your relationships. How will the kids react when they realize the credit card companies aren’t calling anymore? How will your neighbors react when the debt collection agencies quit calling them? How will your wife or husband react? Even if you aren’t behind there is going to be reason to rejoice...and you will have moved the needle.
0 comments:
Post a Comment