Everyone knows its nice to have more money, but what you do with your money is just as important as having it. A budget is the best way to help you do that.
So today we’re going to talk more about budgets and how to manage them. If you missed my first post you can find it here. I’m going to give you three examples of how I could be using our money and what that could lead to in terms of our financial goals. This post is going to be a bit more visual heavy than usual. I’m going to make some visuals to really show you the difference between these three different levels of spending.
In the process maybe I’ll be able to kick my own butt into gear while lowering my financial independence date. (DEC 2024 as of right now)
- AVERAGE American Family. Overpaying for services and things that we simply do not need. Spending money frivolously and without any thought for the ultimate future. These individuals would be putting nothing towards their retirement or savings. No investments. No financial plans for the future.
- The Middle Ground. At least 30% of the income coming into the house is going into savings. This is approximate to the recommendation put out by financial advisors today. Notably that most people are not following. There may be some savings, but likely there will still be debt and they will have a nest egg, but not the one that they like.
- Mustachian Savings. I am aspiring towards Mustachian levels of savings. The term comes from Mr. Money Mustache and his blog. He advises saving at least 60% of your income towards your savings. If you like his budget he has plenty of advice, most of which I’d highly recommend.
A few notes before we continue
- My rendition of a mustachian budget is not nearly as far as one could go. I suggest you check out this post if you want to see the yearly mustachian budget from the man himself. Just their basic living expenses are under 25k per year!
- The following example is to show you how powerful controlling your budget can be.
- The following budgets are based on things my family would buy and probably don’t include everything else that others might include on their list.
So let’s get to it. Below is a chart showing three different budgets.
Now you notice that in Budget one, there is little concern for paying off the debt in comparison to the other two options. Honestly, even putting that much extra is probably more than the average American family can put towards extra. They are spending more on food, gas, and well everything. They find a way to spend nearly all of their money on something. Their personal spending is high.
Budget 2 exemplifies something close to our current situation. I save a bit back each month (though I will likely change that soon). I pay off a decent chunk of debt each month. We’ve curbed back how much we spend on sitters opting to use my homebound parents for shorter outings and sitters for prolonged absences. We don’t have the best insurances, but we have a little extra since we just paid off a car, which a mustachian would call a bad buy. We also make sure to turn off everything we aren’t using and we even keep somethings unplugged or have surge protectors turned off.
The third budget is cut the most. The cell phone is a small carrier, barely any babysitting time. They dry their clothes on the line to save electricity. They may even keep their heat and air conditioning lower than their peers during their respective seasons of use (I wish I could do this, silly medical problems). Less spending. Lowest coverage on the insurances. They probably don’t have cable at all, though they have internet and maybe Netflix or Sling. They save a lot of money to put towards debt and to later put away.
So what does all that mean in terms of their debt?
Well, nearly every American has debt and many of us have it in spades. It seems inescapable. Most households are in the negative if you count their debt. So let’s look at what would happen if you took all that extra money you saved each month and put it towards lowering your debt.
The following image is based on results from the debt calculator I shared. It shows how much they paid toward their debt and how that affected the date they finished paying off the debt.
(Again based on my 80k debt)
We have four debts
- Credit Card 3000
- Monthly Payment: 100
- Navient 5800
- Monthly Payment: 100
- Perkins 5700
- Monthly Payment: 80
- Fed Loan 64500
The first budget is looking at another 11 years to pay off that debt. I don’t even want to think about how much interest would be accrued and applied at that rate. The second budget will take another 6 years, over half that of the first. The final approach saves yet another three or so years. The difference between the first and the third is over 8 years.
This alone should be enough to prompt you to put as much as you can towards your debt.
What about Interest?
Interest plays a large factor in how much you pay over the course of your loan. The longer you have to pay the more money they make off you. So let’s take a look at how much each budget pays in interest over the course
- Around $36,300
- Around $17500
- A little over 9,000.
So not only do you get out of debt more quickly but the more you cut, the more you save in interest costs. If I could cut my budget this much, I could be saving 27k over the course of my loans.
That is mind-boggling to me. The massive amount of savings is enough to help me aspire to spend less and save more.
What would you be willing to do to save 27,000 dollars?
The point is, that we can bargain our future or save ourselves now. Why make just the minimum payment when we can take much larger chunks out of our debts? Paying off debt just makes sense.
The Next Step
Where do we go from here?
To the next step of course. But first, let’s take a step back and recap what we’ve talked about so far. We’ve:
- Made a Budget
- Started an Emergency Fund
- Paid Off Our Debt
In the next post, I plan to continue with the theme of financial independence. I hope to cover the following:
- Building the full emergency fund
- Starting Your savings
Until next time, I hope you enjoy the links and have a wonderful day. Maybe some of the content here will lead you to financial peace.