The Big Debt Hole
In many respects, I am an anomaly among my friends and colleagues. So are my parents. They’ve never been in debt (other than the mortgage on their house) and neither have I. Unfortunately, for most people that isn’t the case.
According to The Huffington Post, the average American household has $97,000 in debt. That’s a lot of money. Like…two or three (or four) years of many people’s annual salary. In fact, according to the U.S. Census Bureau, the average household income from 2006-2010 was $51,914, which comes out to $4326 a month, before you take out taxes. So if you have as much debt as the average American family (again, $97k) and you make what the average American family makes (we’ll round up to $52k), that means that it would take you 22.38 months (so just under 2 years) to pay off all your debt if you didn’t have to pay taxes or anything else.
Add to that the fact that 34% of families paying for college took out student loans, and the average student loan debt for borrowers under the age of 30 is $21,000, according to The Huffington Post.
Simply put, a lot of people have a lot of debt, and it’s hard enough to save money when you’re just trying to pay the bills and sort of have a social life, much less pay bills, have a social life and pay off debt.
So how do you pay off debt, pay your bills, have a social life, and still save?
Well, there’s a couple different schools of thought when it comes to paying off your debt — we’ll call them gradual and snowball.
The gradual method is pretty standard for a lot of people. You pay the minimum payments (or more, if you’re able) on every piece of debt you have until it’s all paid off. For some people this works really well because they continually see the debt they have dropping and that’s good motivation for them.
Another method, introduced to many people by Dave Ramsey, is the snowball method. Instead of paying off minimum payments on all of your debts, you focus on one, starting with the smallest debt and go from there, so that your debt payments “snowball” until you only have one left. So if you had five debts of say $100, $250, $500, $750, and $1000. You’d start by paying off that $100 debt right away. And then instead of paying a little bit on each debt, you can take whatever you would’ve spent on the $100 debt,in addition to what you would’ve spent on the $250 debt and pay that as well. For those people who like “little victories” this method can work well, because instead of constantly seeing things drop little by little, you can celebrate mini victories here and there as you pay off one debt after another.
In the end, it’s really a matter of personal preference, but the important thing is to remember to make sure that your essentials are taken care of first, because I can pretty much guarantee you’ll be a lot more stressed about paying off your debt if you’re also stressed about making the rent bill and the electricity bill and buying food.
So, no matter how you pay down your debt, make sure your necessities are paid first. And then worry about the debt.
Using the Budget in Real Time
So now comes the big question…once you’ve set up a budget, how the heck do you make it actually work? How do you know that it’s realistic? How do you stick with it?
Well, the first thing to remember is that it’s going to take you a little bit of time to adjust to living on a budget — especially if you’ve never been on one before. Like any new habit, it takes time to get used to it. It’s gonna take some time to get used to actually paying attention to where your money goes and what you’re spending it on and remember that sometimes you’re gonna have to say, “No. I don’t have the money for that.”
Generally, I’d say give it three months. Like a new workout routine or a new diet or anything else, give it three months and at the end of those three months, reevaluate. What part of your budget worked and what parts didn’t? What parts of the budget did you underspend and what parts of your budget did you have a tendency to overspend? Very objectively look at the parts of your budget that may need to be increased or decreased and adjust things accordingly.
It’s difficult. I’m definitely not saying it’s easy, especially when friends want to go out to happy hour and to movies on the weekends and to lunch during the work week. It’s really easy to overspend, particularly in some of those discretionary categories, but if you stick with it, in the long run, you’ll be a lot happier because not only will you have a paycheck that will help you pay for rent and other necessities, you’ll have multiple thousands saved in the bank.
As for how to actually stick with it, again, it’s a matter of opinion, personality, and personal preference.
Some people like spreadsheets. Some people like computer based programs like Quicken. Others like web based programs like Mint.com. It really depends on your personality. Are you good about knowing how much you’ve generally spent in a week? Or do you need to keep track of it day-by-day, transaction by transaction?
We’ll go over these a bit more in detail in the next couple of posts as we explore some of the ins and outs of setting up the budget and determining your budgeting style.