Friday, February 20, 2009

Bills, Budget, and Cash, Oh My!

Since our debt-free scream two weeks ago quite a few people have asked us, "How did you do it?" People have not been asking in awe so much as the are curious about the details of becoming debt free. I thought I'd share our methods with all of you out there in blogger land.

Baby Steps: We did follow Dave's baby step plan:

  1. Save $1,000 to use for emergencies after you cut up your credit cards. (For single men or women this amount is lowered to $500.)
  2. Get out of debt using the "snow ball" method. Focus on paying off the smaller balance first and don't worry about which one has the higher interest rate. We know the math doesn't work, but after all debt usually isn't about math, it's about behavior!
  3. Have a 3-6 month emergency fund in place. This needs to be in an "easy to get to" place i.e. not the stock market!
  4. Save for retirement. Dave says 15% of your income should go here.
  5. Save for college. We are still working on how much money we want to save here and there are several ways of doing this.
  6. Pay off the house. We are planning on making extra payments monthly.
  7. Build wealth and give!
Here are some more specifics (things that I can't usually explain in one conversation):

No credit cards: After attending Dave's live show we saved up $1,000, cut up our credit cards and have not had one since. Well, I did have one that I got from Amazon because of a "deal", but that one ended up biting me in the butt. I got the card when I purchased something online and a couple of months later still had not received a statement. Little did I know the "Amazon" card was really a Chase card and anything we were receiving from Chase at the time went straight in the garbage. Yeah... I canceled that card and haven't been tempted by "special offers" since! Philip still has a credit card that is through his employer, and it is only used for travel expenses.

Budget: We do live by a budget that we set up in an excel Google Doc so that Philip and I can both view and edit it. This budget has looked different over the last four years, but currently we are working from one that is my creation because I do most of the updating. I do set up a new worksheet for every month because our budget changes a little each month (you only buy a Christmas tree once a year). I have Philip's income listed on the left and all of our bills under that. My income is listed off to the side because we don't use it on bills and it use to go straight to (after tithe) pay off our debt. I've posted a sample here with some FAKE numbers so you can get the idea. I haven't run the percentages in a while, but I may do that soon and share that info too.

Once a month I transfer a set amount of money to my USAA account (the "bills" line item) and I pay all of our monthly bills online through thier free service. It is way cool because I only write one check a month, the rest comes straight from them and I never have to buy stamps!

The envelope system: We do use the super cool envelope wallet that Dave sells. Once a month I go to the ATM to get out cash for the following envelopes:
  • "Us" - used to eat out
  • "Allowance" - Philip and I's burn money
  • "Ethan"- this is used for diapers, clothes, toys, new cups, etc.
  • "Babysitter" - this one is self explanatory
  • "Clothes" - this if for Philip and I to buy shoes, clothes, or haircuts!
I also get out a set amount for groceries every Friday. This is one example of how our line items change month to month. During some months there are four fridays, but some have five. During the Christmas months I also get those planned amounts out in cash before hand.

Why use cash? I know most people don't see the point in using cash instead of a debit card, but here are a few of my thoughts. Research shows that you spend 15% more when you use a debit card. Counting out cash and handing it to someone has emotional consequences, swiping a card just doesn't have the same effect. A new study that just came out even showed that people spend 50% more with credit cards that have point programs.

I love using cash because I don't have to keep up with how much I've been spent so far in a month. When I look into an envelope I know exactly how much I have left and at the end of the month there are no surprises! It really is a passive way of controlling your spending.

Other expenses: For gas, pets, and medical needs we use our debit cards. We have found that in these areas we are never tempted to spend above what is needed and I base my budget on what the need has been over the last few months. Just recently I got to cut down our gas line item because I realized I was over budgeting since gas prices have fallen. I'm sure over the summer I'll have to tweak that a little as prices start to rise again.

I hope this sheds some light on the nitty-gritty of how we handle our finances and defeated our debt. I am more than willing to answer anyone's questions, so if you have any please send them to me! Another thing that we do that is a lot of fun is that we don't spend any change. Well, I do think Philip does, but I don't when I'm shopping and such. Then every couple of months we have about $80 or so that we can "give away". Lots of fun!


MaryBeth said...

I started listening to Dave Ramsey during my 40 minute commute home from teaching school. We've been using the envelope system for almost a year now, and it really helps. We are still working on being able to say that we are debt free :)

Betsy said...

So inspiring, my friend!