Have you recently started FPU or are considering it? It will change your life by leaps and bounds! If you are needing some help getting started then let me walk you through some things.
Do you have a written budget?
This is what you need to start with FIRST. Write down the amount you will make in a month and subtract each expense from it. Every dollar should be assigned. Now go back and add things you may have missed like clothing or car upkeep. You may not use this every single month but it will help to put money into it regularly so that you will have it when it’s time to get the oil changed. Also if you have debt, don’t forget to include those in your budget. (Just write down the minimum payments) The first month of doing this will be hard because you will forget things & things may come up. Do you have too many expenses and not enough money? You may need to cut some things out. (cable, magazine subscriptions, your restaurant expense) Do you have too much money and not enough expenses? Not a bad problem to have. Even if you have that money going to savings, you must allocate it somewhere!
Do you have an emergency fund?
If you are just starting out, figure out which baby step you are in. Baby step 1 is $1000 in the bank. This is your base emergency fund to get you through baby step 2 which is paying off your debt. This is a VERY important step because life happens and you need this tiny but helpful cushion ‘just in case’! (Car breaks, hospital trip, etc) You must get this very quickly. Have a garage sale, sell some stuff, consider a part time job. You should be able to get $1000 very quickly so you can move on in the baby steps. If you do NOT have any debt, then you skip over to baby step 3 which is your FULLY funded emergency fund. This is 3-6 months of expenses put away in a money market account. This is for unforseen emergencies such as job loss, death of someone, hospital trip, etc. When you have this, you no longer have to have your credit card for emergencies. Also when you have this, your ’emergencies’ are no longer the same type of emergencies you would normally have because you are smarter with your money! You should know to ‘expect the unexpected’ because life WILL happen, Christmas comes every December and kids will grow and need new clothes! So consider yourself warned!
How does the Debt Snowball Work?
So you have your $1000 in your emergency fund (unless you make less than 20K/yr then it’s only $500 in your emergency fund) and you are ready to tackle your debt. You will work this with the debt snowball. List out all your debts from smallest to largest. Don’t worry about interest rates… if you were good at math you wouldn’t be broke. We owed Kohls about $50 and on down to student loans that we owed 4 and 5K each. You are going to pay the minimum payments on every debt listed. If you pay $10 to Kohls every month then you will pay $10 to Kohls. If you pay $50 to student loans every month then you will pay $50 to student loans every month. Here’s where the fun part kicks in. You are going to squeeze money out of your budget to put on the top of your debt. So we sold some stuff that first month and boom, Kohls was gone. We then took that minimum payment of $10 going to Kohls and rolled it over to the next one (which was our couch) We were paying $100 minimum to our couch so our new debt snowball was $110. That next month we sold some more stuff and boom we paid off the couch. After we sold stuff, had a big garage sale, cut items out of our budget, we got a really big snowball and it started rolling down and knocking out our debt. The reason you don’t tackle the one with the largest interest rate is because you get them small ones paid off and you start to win! You get those ah-ha moments and you see it working! Once you get to the big ones you will have a big snowball to work with and just be knocking it out!
The Cash in Envelopes System Works!
Along with the full written zero based budget comes the cash system! This is not new, it’s worked for people for years! We just need to bring it back! Get rid of your credit card completely and only focus on your debit card and your cash. The cash system is sooooo ooooo oooo importannt! You feel the pain of using cash and when it’s gone, it’s gone. You cannot overspend in any area. For us starting out, we used cash for everything except bills paid online, christmas (which we transfer to it’s own savings account) and gas. We even broke up food into restaurant & groceries to be more specific about our spending) I’m on the nerdy/anal side. 🙂
A couple mechanical questions:
What do you do with money leftover in envelopes at the end of the month?
The first few months will be adjusting as needed to have the right amounts in your envelope. If you notice that you are going over by $50 every month in your groceries then up your grocery amount $50 higher. If you continuously have $100 leftover in your grocery envelope then consider throwing that money on debt or raise another catergory if you need. You really shouldn’t have anything left over in your regular envelopes because you want to make the most with your money. Most people don’t do car upkeep and buy clothing every month so these types of envelopes are okay to rollover every month. Think of how nice it will be to not feel guilty when you’ve saved $200 in your envelopes to go get new clothes! That was a huge relief for me!
What does Dave think about borrowing money between envelopes?
If you have something come up where you need to have a few extra for groceries and a little less for entertainment then talk with your spouse and if your spouse okays it then you are good to go. He wouldn’t advise that your envelopes hanky panky every month or what’s the point in even having your envelopes? It would just be like one big envelope!
Is it really 80% Behavior to win?
Yes! You can run the numbers all day long and you will get nowhere until you put the principles to action! Think of someone you know that has wanted to lose weight. Yourself maybe? When you hear that person complain “uugh my pants are too tight, what an inconvenience” and then they go eat a donut. Do you see that person losing weight anytime soon? If you see someone say ‘My pants are too tight, I’m so disgusted with myself! I’m going to the gym after work”. (And they actually go to the gym after work) Do you think that person will lose weight? Most definitely! You have to get fired up! You will need to develop a healthy level of disgust with your situation to want to change! It’s not about finding the right work out attire, it’s not about how you fix your hair when you’re working out, it’s not about what envelopes you use, it’s the person looking back at you in the mirror! 80% Behavior!! It’s about thinking and believing enough is enough!
Even if you are not in a financial ‘mess’ are you where you could be? Will you be ready for retirement? Don’t wait on the government to take care of you, it’s not going to happen! You are responsible for YOU and your family!
We’ve always had money and have done what we wanted but I’m so thankful that we hit that level of ‘rock bottom’ over a year ago. I truly believe that saved us! It gave us that motivation we needed to kick it in gear. The first couple of months of FPU we were just ‘kinda sorta trying’ to do it. Well we were also getting the ‘kinda sorta results’. Our intensity and behavior change is what got us through 30K in student loan debt in 15 months. Don’t wait until you hit rock bottom, decide to start NOW!
If you have any questions, feel free to ask!