I finally decided that every financial adviser on the planet is right and I should be living with a budget.
|John McNab- Flickr|
It all started with this article about a guy who aggressively paid off a huge amount of debt in one year. I was intrigued by the article, but when I read the comments I found out that this is actually Dave Ramsey's "debt snowball" approach (although the article doesn't mention Dave at all).
I read a little more about Dave- I feel like we are on a first name basis already- and picked up his book The Total Financial Makeover from the library.
This plan is totally common sense, but it takes a huge commitment. Dave describes it as a need for "gazelle like intensity." You basically whittle your finances down to the lowest possible level, sell what you can, and possibly pick up a second job to help you achieve your goal. He includes tons of success stories- Four person households making $46,000 per year and somehow eliminating $60,000 in debt in 20 months. The common feature in the testimonials is the sense of peace that comes from getting out of debt. No job is completely recession proof right now- imagine facing a layoff in your present financial state. Now imagine it if your only debt was your mortgage and you had a six month emergency fund...
Bottom line is that I really want to Ramsey my debt, but I am not ready to do it right this minute. My finances are good not great- I live on less than I earn, don't have any credit card debt, I have some decent retirement savings, and a small emergency fund. On the other hand, I am upside down on my mortgage and I drive an 8-year old Hyundai with very little set aside for my next car. I am living on the assumption that I won't be laid off from my job, but Dave reminds me that if something happened and I became unemployed, my household would lose 100% of its income. Save for a rainy day, he says. It will rain.
So I'm not ready for gazelle-like intensity. Yet. This is the year of big travel, but I suspect 2012 will be the year of the gazelle. Meanwhile, I'm setting the framework. I have already learned not to buy so much crap. I'm pretty good at saving in advance for big purchases. I recently started a cash diet to help me spend less. Now I have to learn how to stick to a budget.
I told you recently that I don't want to have to log everything I spend into a spreadsheet- I really hate the idea of receipts all over the place. The Dave solution is much easier- budget the amount of money needed for groceries, entertainment, pet food (a big expense in my house), etc. and put the cash into envelopes. When your dining out envelope is empty, you eat in. When your purchases envelope is empty you don't buy anything else. My grocery envelope is almost empty, and I am looking through the freezer and pantry to stretch it until Friday.
Dave warns us that as soon as we resolve to eliminate debt, there will be a test. On Tuesday, as part of a trifecta of terrible events, my car's alternator died. I spent over $400 to replace it. My plan has been to establish a sizable down payment before I buy my next car, but I started thinking about how much easier it would be to have a car that doesn't make me nervous. Instead, I fixed the alternator and got my head around the idea that an occasional big repair is still cheaper than a new(er) car. Dave says, "If you will live like no one else, later you can live like no one else." So I'll just have to get one of those bumper stickers that says, "Don't laugh, it's paid for," and make sure my cell phone is always charged.
So long for now, KISS (keep it simple stupid), and maybe check out some Dave at your local library!