I have spent the last two years working on refining how we do our budget. Reading blogs, reading books, watching shows, listening to family members and friends.
The list continues to grow every few months.
Our financial plan is ever evolving and changing. I think that is a good thing.
When we first started out we read the Total Money Makeover because, Lord, have mercy all I ever hear is Dave Ramsey all over the interwebs.
We read it, we liked some of it. And, wow, oh wow, did we not like other parts.
I had been using YNAB since, 2010 or so. I knew their methodology a little and so we borrowed from there as well.
Then, more recently, we watched a TV series called Life or Debt. He mentioned a principal that we found to be interesting and have just recently began to apply that to our monthly budget as well.
I am going to walk you through these three tid bits: YNAB, Dave Ramsey and then Life or Debt.
Jumping right in.
You Need a Budget: YNAB
I have written about YNAB before so I am just going to leave it at; it is a pretty kick awesome budgeting software. I have a comprehensive review on my list of posts to do! I will be working on that once I return to Hawaii.
There are a few things we have taken from YNAB’s methodology and applied to our financial plan.
- Give Every Dollar a Job
Seems so obvious doesn’t it?
When a paycheck hits the bank I allocate it to a category called Buffer for Next Month. Then once all our paychecks for the month have been deposited I release that category and begin to budget.
By giving every dollar a job I know what my money is doing. I don’t “lose” money through random spending.
2. Live off Last Months Income
This is simple to say and harder to get to doing, but possible with some hard work.
Anything that comes in as income for this month (June) is budgeted for July’s expenses.
Some months are leaner. Some are not.
We were lucky enough to be able to pull from savings to be able to get to this point. Some suggestions to get to living on last months income are to save up your tax refund, extra paychecks, or anything leftover at the end of the month.
This just gives us peace of mind and makes us more conscious of what is coming in. We have a fairly variable income.
3. Do Not Carry a Negative Balance Month to Month (Roll with the Punches)
Life happens. Sometimes you forget to budget an expense.
Sometimes you spend more at the grocery than you meant to.
Sometimes you say screw it and buy something you couldn’t afford.
I’m not saying the above is okay, but it isn’t the end of the world.
YNAB taught us to roll with the punches. If we overspend a category then we play whack a mole by “borrowing” from other categories, or on the rare occasion next month, to make the current month even.
Logically, you shouldn’t do this too often because at some point you will be robbing Peter to pay Paul, so it really isn’t doing you too much good. If you find yourself playing Whack a Mole frequently, it may be time to revisit the budget and make it more practical to your daily needs.
I like Dave Ramsey…but I don’t.
His information is good but I really cannot listen to his radio show. I find him to be rude and condescending to a lot of callers. Granted, they guy has answered most of the questions people ask on the show in a previous show or in his books.
So, what have I learned from Dave Ramsey.
- Snowball vs Avalanche
Neither is wrong. Do what one makes the most sense to you. As long as you are sticking with the program that you choose you will make great progress.
The Snowball method is paying your debts from the smallest loan balance to the largest loan balance.
The Avalanche method is paying your debts from highest interest rate to lowest interest rate.
We chose to do the Avalanche method because we are paying back Mr. Wanderlusts Parent Plus Loans, that are in his parents name. They have an interest rate of 9 percent, and are some of the largest individual balances. In theory, we save some interest by paying off our loans this way compared to the snowball method.
However, the snowball method is good for people psychologically because you make small wins, for many, right out of the gate.
2. Credit Cards Are Bad….
If you do not use them correctly.
If you are using a credit card like the average American, then you are hurting yourself by taking out a high interest loan on your groceries.
We pay our credit card off each month and now we do not pay any fees. I had some random fee that I elected to pay, when I first opened the credit card not knowing what it was. We recently took that off of our card. Now, our credit card is a fee free card that gives us cash back rewards for our everyday purchases.
If you know you cannot or will not (for whatever reason) make payments on your credit card, on time and in full, then you should avoid credit cards until you have that discipline. It is hard, but it isn’t worth the interest.
3. Have a Zero Budget
This is very similar to giving every dollar a job.
You take your money for the month and budget until you hit zero. That way you know what you have to spend on what categories and, potentially, where you need to make cuts in your budget to come out even for the month.
Life or Debt
This is a TV show, where a guy named Victor Antonio goes out and helps families get back on track.
At some point in the series he brings up his 30/30/30/10 methodology.
I have seen those charts where they tell you, you shouldn’t spend more than x% in these dozen categories.
Frankly, way too many categories for me. I just, don’t have the patience for that. I’m sure it works great for some people.I mean, that theory has existed for a long time.
Just not for me.
Life or Debt’s breakdown is just simplified but ends up doing the same thing. You take your income and allocate it as followed:
30% to debt/savings
10% to fun/you
Since we are a military family we are provided a housing stipend. I subtract the cost of our rent out of the total income for the month and then use these percentages. We just started this for the month of July (so next month).
Since our housing is covered we are putting that 30% towards debt at the moment. It will eventually transition over to a down payment for a house.
This seems really straight forward to me. Which is part of why I like this.
Debt/savings is exactly what it sounds like. When our debt is gone 10% will be liquid savings and the other 20% will go towards investments.
Housing we will only include our housing payment (rent/mortgage).
Expenses are all bills and that type of thing.
10% is our date, entertainment and personal money.
I really like to use this because it makes me really think about what my money is doing. I have to be more conscious about what I am spending in categories rather than just aimlessly plugging and chugging, which I was doing.
For next month, using the above percents we were left with around $900 dollars that needs a job.
I don’t think that would be the case if I had just plugged and chugged like I normally do.
What is your Personal Fiance Plan?