So you want to get out of debt, aka G.O.O.D.?
I commend you. Getting out of debt will help you in so many ways and truthfully it isn't that challenging once you get the ball rolling. It all starts with first recognizing that debt is an emergency, no matter how you justify it in your head.
Once you recognize the fact that your debt is something you need to fix, the next step is to make sure you are operating within a budget.
But where do you start when it comes to budget?
Budgeting is like a double-edged sword. It is good to know where your money is going and track your spending, but it can sometimes produce a “scarcity” mindset.
That being said, starting a budget doesn't have to be some difficult task, in fact your budget should just consist of a few things:
- Fixed monthly expenses
- Variable monthly expenses
- Debt monthly payments
Related: 2019 Budget Recommendations.
So over the next five minutes, you will read how to use the attached budget sheet or “GOOD Sheet” and fill it out step by step. This article will teach you how to cut some variable expenses and how to track your spending. But first… let's go back in the day!
Budgeting before debt was popular.
Personally, I used to rationalize my debt. I would justify my credit card spending nor my financed truck with, “Everyone else does it.”
But then I thought about people from the good ol' days, back when getting into debt wasn't so easy. You either had the money or you didn't.
When I think of these people I think of my late grandpa. He never had or used plastic or credit. He only used cash. In fact, when you talk with someone from the good ol’ days they bought only what they could afford.
There were no wants – only needs.
Maybe it was from the frugality they learned from their parents who grew up in the depression era, but simply put if they couldn’t afford it – they didn't buy it.
However, over the years lending has grown to the point where the average American is in $137,000 worth of debt as of late 2017 according to the Federal Reserve.
So in order to GOOD where should you start? My answer is simple:
Start with a budget.
Whether it is student loans, auto debt, credit card debt or even a mortgage, debt knows no boundaries. Consumerism and advertisements promote a life of life now, pay later (YOLO) and get what you want -when you want!
If you do not think debt is serious, use a basic amortization calculator and input your debt. I ran the numbers for just our student loan balance from 2017 and we would have to pay $107,764 in interest alone if we didn't focus on paying off our student loan debt. What is your number?
Don't forget to throw in the mortgage and see how much interest you will pay over the next 30 years. All that money going to interest is money you could save or invest to increase your savings rate.
So while the idea of saving money and possibly even paying off all of your debt, heck even your home, might seem far fetched, it really isn't if you start using a working budget.
Seriously considering using a budget is essential.
American Budgeting Problem
I recently read a figure that 7 in 10 adult Americans do not use a budget. This is alarming, especially when considering the fact that less than half of Americans have $1,000 to their name.
- 80% live paycheck to paycheck
- For married couples, 40% of divorces are related to financial stress.
- Most complaints we hear seem to revolve around the common theme of income and not the surplus of it.
So while some people may complain about money, it is hard to complain about something you are not taking serious (It's like the person who complains about others using their cell phones at the stoplight, then they do the same thing – what gives).
In late 2015 my now wife and I recognized that we were one of those 7 who wasn't budgeting our money. Growing up I never heard my mom or dad talk about budgets, so budgeting was not innate.
When we realized we sucked wanted to pay off our $300,000 student loan balance the first step we took was getting on a budget.
Along the way, our budgets have changed, but I figured it would be beneficial for readers to see the budget forecast sheet we started with.
It is nothing special and free download is below. Feel free to use it, change it, or just take a few ideas from it. The budget sheet includes a monthly expense/living forecast tab for the year, as well as two additional tabs for assets and debts.
But before you start your new budget, here are 6 reasons why you should have a budget!
6 Reasons why you need a budget:
- Take control of your finances with a living forecast.
- Hold yourself accountable & have financial goals!
- Budgets keep you honest when you identify high spending categories.
- Knock out debt and create financial choice quicker
- Accomplish life goals faster
- A budget helps you plan ahead!
Starting a budget in 7 simple steps.
Budget Step 1:
Take the time to actually create a budget. Download the file here, (preview below) and rename categories that apply to you (Just leave the categories that do not apply blank, do not delete the entire row). Everything is auto-summed monthly and yearly giving you a monthly and annual breakdown. I included a fictional sample in the download.
Budget Step 2:
Back-fill the previous 2-3 months prior to starting your budget. This is important. It shows your spending habits. For example, if you are starting your budget today in the month of August, you would want to show your spending from May – June – July. It will help you see where your money went!
Budget Step 3:
For the current month, list the money you aim to spend in each category. This is your new adjusted spending goal. Maybe you were spending $800 on groceries and now your goal is $400 (Read more about: Grocery Saving Tips!). Now you have targets and a living forecast based on the budget you set for yourself.
Budget Step 4:
Weed out and cut down on excessive categories. After back-filling 2-3 months and setting goals, now you can begin to target the areas where you spend the most money. Personally, this step netted us $840.00 alone, see my rainbow-colored table below.
Budget Step 5:
Figure out what % of your earnings are getting spent on variable expenses and really limit that. Take the monthly expenses and divide it by the monthly earnings. The goal is to work towards the 80/20 rule. Using the pay yourself first strategy, at least 20% of your money should be going to debt or your savings rate.
Budget Step 6:
Track your spending.
I realize filling out spreadsheets monthly can be a bit tedious. I think using a spreadsheet to set up your budget is important because the ACTION of creating and completing a spreadsheet will hold you accountable.
Tracking is super simple thanks to apps like Mint. Additionally, most bank accounts will let you categorize your spending, but I just recommend linking everything with Mint and using your budget sheet you created to set your budget limits. Mint will even notify you if you are approaching a budget limit.
Budget Step 7:
Revisit your budget monthly.
This is huge. Set up times to go over your budget with your significant other one time a month for 20 minutes. No significant other? I recommend finding a trusted person to talk with to hold yourself accountable
This is important since most people naturally justify their spending habits in their own mind!!!
Additionally, fill out the asset and debt snowball tabs located at the bottom. These are not the focus at this point. Budgeting and developing budget habits is priority numero uno. However, once you have a good handle on your budget then you can see what you have leftover monthly. Which is when you can start investing with something like Acorns or M1.
I hope this helps and feel free to use it, find another budget sheet, or do with it whatever you please. Contact me if you have any questions or share with someone who you know needs a budget 🙂
Question: What budget or app do you currently use? Comment below.
Josh writes about ways to make money, pay off debt, and improve yourself. After paying off $300,000 in student loans with his wife in less than five years, Josh started Money Life Wax and has been featured on Forbes, Business Insider, Huffington Post, and more! In addition to being a life-long entrepreneur, Josh and his wife enjoy spending time with their chocolate lab named Morgan, working out, being outside, traveling, and helping others with their finances! I got serious with money when I used Personal Capital to track my finances.