Congratulations, you have secured an income in this slowly healing economy! Your next concern may be healing your financial well-being, reducing credit card debt, increasing savings, etc. But where do you start?
You start with your budget! When you get your pay check, sit down and prioritize your bills. Don't just pay things as they come. Put your spending plan on paper and stick to it.
Example: Net take home pay, lets say $1,200 bi-weekly ($2,400 monthly). Pending bills coming due: rent $600, utilities $150, student loan $250/Car note, car insurance $100, credit card minimum payments $150, life insurance/miscellaneous $100, internet/cable/ent. $100. cell phone $70, Total monthly bills $1,520
Note: You may have a higher net take home pay than $1,200/ bi-weekly, but your monthly bills are probably higher if you earn more. You may have a lower net take home pay, but your bills may be lower as well. Stay with me, this is just an example to illustrate budgeting.
Add in food, average of $10/day times 28 days $280
Transportation $5/day times 28 days $140
Total spent on survival (or use of disposal income): $1,940 out of $2,400 leaving you with a discretionary income of $460 a month.
You can tweak this discretionary income by maybe forgoing cable and freeing up time for reading and other things. It is not uncommon for people to spend $80/month or more on cable,
Or maybe you can cut your food expense down to $8/day by eating out less and cooking more/bringing a lunch twice a week. Cutting your food expenses down to $8 day will put an extra $56 in your pocket (note: using a 28 day month x $2 saved per day = $56).
So, by cutting out cable for a couple months and reducing your food expenses (by mooching free meals and tv shows at friends and family's houses) you could add almost an extra $140 per month to your pocket! This can be a three month sacrifice to earn $420 to put towards paying off a credit card.
Let's say you don't make the sacrifice and let's work with your $460 of discretionary income per month. Where does this usually go?
Well most people probably eat more like $14 day when you factor those who eat out twice a day or go to sit down restaurants on the weekends. So that extra, $4 a day times 28 days = $112 of your spare $460, brings you down to $348.
You buy that pair of shoes or go out a couple nights there goes another $120. Now, you're at $228.
You get a ticket or have a small car maintenance expense, there goes another $50 -$150 dollars, lets say $100. So, you're down to $128. What do you do with this $128 dollars? Maybe you give a tithe or to charity (good thing) or add up your miscellaneous coffee/snacks/etc. and there is your paycheck. Let say you commute a good distance for work or pay for parking, your transportation expense could be more like $10/day, an extra $5 than previously budgeted x 28 days $140 per month in expenses.
So, you see if it's not this, it's that. Maybe your net take home is $1,500 or $1,800 every 2 weeks chances are you probably have rent higher than $600/month or more than $250 in student loan/car payment that was budgeted in the example. Bottom line is that pretty much everyone should budget.
"After I budget, what is the best use of the extra money?"
My recommendation would be to start small with your sacrifices. Bring a lunch 2 days/week or hold off on buying new shoes or clothing for 3 months. Or look into reducing your cell phone plan/cable plan for some time until you find a way to earn more income.
There is a balance that everyone has between saving for tomorrow and spending for today. This balance is a personal preference. All I ask is that you audit your spending or break it down and see where it goes (mint.com provides a service like this if you primarily use credit) so that you can make better decisions about your financial future.
Wouldn't it be great if you could create an extra $150 or $200 month to pay down credit card balances faster or invest and build wealth for your future.
But, what do I invest in? Where do I start? Check out our next blog "Smart Investing".
Or your question maybe "I have so much debt split up on different credit cards that its overwhelming, where do I begin?"
Simple answer, continue paying your minimum payment on all, but use some of the extra discretionary income you created (bringing a lunch, less cable tv, etc.) to add toward your payment on your lowest balance and pay off cards from lowest to highest (debt snowball method, Dave Ramsey).
Card 1 $2,800 balance ($70 min payment), card 2 $400 balance ($20 min payment), card 3 $1250 balance ($40 min payment), card 4 $500 balance ($20 min payment).
Extra income found from budgeting $200, Minimum payments total $150. $350/ month going toward credit card payments.
Month 1: Pay minimum payments on cards 1,3, and 4 ($70+$40+$20= $130 of $350 for credit card payments, leaving $220). Pay minimum payment, $20 plus $200 on card 2. $220 total paid on card 2, remaining balance on card 2 $180.
Month 2: Pay minimum payments on cards 1 and 3. Pay $188 ($180 balance plus 8 interest added on) on card 2. SHRED AND DISPOSE CARD 2!
But, remember last month you had $220 budgeted toward card 2, so after paying $188 you have $32 extra dollars! Use this $32 to add to the next lowest balance card, card 4. Pay $20 minimum payment on card 4 plus the $32 or $52 total on card 4.
Month 3: Pay minimum payments on cards 1 and 3 ($70 + $40= $110 out of $350 budgeted for credit card payments, leaving $240 for card 4). Remaining balance on card 4 before this months payment $450. Pay $240, leaving $210 balance on card 4.
By month 4 you will have paid off card 4 (AND SHREDDED IT!) and have reduced your number of payments to worry about from 4 to 2 in 4 months. Imagine when you only have 1 payment to worry about (card 1) and because of your budgeting you could afford to make $350 payments on it instead of the $70 minimum payment, you're now paying 5 times that amount! Imagine how fast you will pay it off if by that time the balance is about $2,500. In just about 8 months you could be credit card debt free! (Note: 2500/350 = 7.14).
It would take only about 1 year and 3 months to pay off nearly $5,000 in credit card debt using the debt snowball method in this example ($5,000/350 = 14.29).
In a nutshell, you basically pay your minimum payment on all, but use some of the extra discretionary income you created (bringing a lunch, less cable tv, etc.) to add toward your payment on your card with the lowest balance. Then pay off credit cards from lowest balance to highest balance.
NOTE: If your card with the highest balance also has the highest interest rate, then you should actually pay it down first. This is because you are paying the most in interest payments on this card and it will take you a while to get to this card if you pay more on the lowest balances first. So, if your card with the highest interest is also the one with the highest balance, do not use the debt snowball method. Higher interest rate trumps least balance when paying credit cards.
That does it for this post. I know it was chock full of information and one might say this should have been several articles, but really financial planning starts with budgeting and reducing unnecessary liabilities such as credit card payments when you can. So, hopefully you pass the word on because many people would be in much better financial shape if they followed these principles.