How to Create a Bulletproof Budget – Part IV

Roughly 60% of Americans do not have a monthly budget. Hopefully, this series is helping you make your way over into the 40% of America that does track their income & spending. Today we’re wrapping up our 4-part series on “How to Create a Bulletproof Budget.”

If you need a budget template to help you get started, feel free to download ours here in either the Excel version or the PDF version. Here’s a picture of the budget for a reference as we go through this.

As you recall, Step One is to determine your monthly income. Today we’re going to finish Steps Two & Three! We’re picking up where we left off in Part 3, which is in the Debt section. Let’s get started!

Step Two: Determine your Monthly Expenses

Debt: Our hope for you is that your hatred for debt and your desire for freedom will eventually eradicate this section from your budget. We weren’t created to live in debt, regardless of how accepted it may be in our culture. For now, consider this section in your budget as a temporary necessity that will eventually go away as you pay off your debt. While this section is very self-explanatory (simply fill in the section with the amount you owe each month), we recommend reordering your debt in one of two ways:

  • Debt Snowball: This is the approach recommended by Dave Ramsey. Basically, you start by paying down your smallest debt while paying the minimums on everything else. Once that debt is paid off, you take the amount you were paying on that debt and put it towards the next smallest debt, and so on. The benefit of this is more psychological than fiscal; by paying off your smallest debt first, it keeps you motivated and encouraged by making quick progress.

  • Debt Avalanche: In this method, you pay off your debt starting with the highest interest rate first and working down towards the lowest interest rate. This method makes the most financial sense as you can save hundreds or thousands of dollars over the long run, but it does take some emotional discipline as you won’t always get the shot of motivation of paying off a loan fast.

Beth & I actually used a combination of the two methods. We started with the snowball method, because we had several small debts (less than $2000) that we just wanted to pay off quick so we could focus on the bigger ones. After eliminating these smaller debts, we switched our strategy to the avalanche method, and began paying down the debt with the highest interest rate, which happened to be a Citibank credit card.

We found a spreadsheet online which allowed us to order our debts in various ways to see how long it would take us to pay them off and how much interest we would lose or save by using the different payoff methods (snowball vs avalanche). We were able to calculate that we would save over $2000 in interest by switching to the avalanche method. Click HERE to go to Vertex42 where you can download their Excel debt reduction spreadsheet (it’s free), which is the same spreadsheet we used.

Step Three: Determine what to do with the Leftover Amount

Budget Totals: If you’re using the budget template in Excel, than the budget totals section should already be filled in with the correct amounts, showing you the total monthly income, expenses, and any leftover amount. Hopefully the leftover amount is a positive number. If it’s negative, it means your expenses exceed your income, and you’ll need to figure out how to either generate more income, or cut your expenses.

Assuming that the leftover amount is a positive number, then this final step is to determine what to do with that amount. There are really only five possible options:

1) Emergency Fund: If you don’t have an emergency fund of at least $1000, then any leftover amount should go towards this. If you have a bigger family, I would suggest a higher emergency fund.

2) Pay off Debt: Once you have an emergency fund in place, we suggest using any leftover amount to pay down your debt, either using the snowball method or the avalanche method.

3) Save: Once the debt is paid off, we suggest you save up 3-6 months of living expenses. This is a safeguard to cover any bigger emergencies, such as health or loss of income issues. After you have this reserve built up, you can begin to focus on saving for other investments, retirement, etc.

4) Invest: Too many people start building the house (investing) before they have the foundation ready (savings). I’m sure some will disagree with this, but we encourage people to hold off on saving for things years down the road until you have 3-6 months of living expenses saved up. Sadly, most of us know people who have had a financial setback or emergency and had to pull money out of their retirement fund because they didn’t have enough in savings.  Build your foundation first.

5) Spend: Most of us are experts at spending, so not much explanation is needed here. One encouragement though would be to not lose sight of generosity. We encourage generosity, even when you have debt. Giving is a powerful tool that helps break the power that money can have over someone’s life. More on this to come in later posts.

Date Night!

We like to end our Weekend posts with a few thoughts you can take into your date night with your spouse. Since this post is a little longer than normal, we’ll just leave you with a couple of quick thoughts to discuss with your spouse:

1) What is the best payoff method for our situation (snowball vs. avalanche)?

2) Out of the five possible options we can choose, what is the best decision for how to use our leftover amount?

Well friends, we hope you’ve enjoyed this series! As always, please drop us a line below in the comment section! If you’ve benefited from these posts, please help us spread the word on Facebook & Twitter.

Committed to your success,

-Wesley

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