Other posts in the Skinny Wallet Phat Life Series
Last week, I talked about how I triumphed over the debt war and the methods that worked for me. The first step in stomping out the debt fire was to sit down and analyze my behavior, habits & patterns. Once I did that it was obvious I had a real lack of discipline. (Truly, it wasn’t such a shocker.) During my analysis, I identified certain triggers that caused me to overspend. The next step was to set up a budget that turned my weaknesses into strengths. If I could find a way to budget so that it was harder to fail, than I would be that many steps closer to the finish line.
In simplistic terms, this is what I did to create a budget:
- Wrote down all of my spending for a month (well – not with pen & paper – I used Quicken)
- Created “buckets” that aligned with my spending, including one bucket called “debt free”
- Assigned budget dollars to each bucket based on what was spent for the month
- Wiggled the numbers so that monthly expenses did not exceed my monthly income
If you’ve ever read ANY article on budgeting, you are probably rolling your eyes by now. Yeah, yeah – you already know all this – you’re no dummy. Well, apparently I was because this is what I was doing over and over and couldn’t figure out why I wasn’t out of debt yet. (What is that Albert Einstein saying? Insanity is doing the same thing twice and expecting different results. Yep – that’s me.) It wasn’t until I took two additional steps that I started to see some results.
- Wrote down all of my spending for THREE months
- Created buffer buckets and moved budgeted dollars to those buckets (in other words, I created a safety net)
Why three months? Well, I always seemed to be on my best spending behavior during the month I was writing everything down. So – I thought if I extended my “probation period” out to three months – I would loosen up a bit and the real spending would shine through. What do you know, it did. OMG! If you saw the frivolity (is that a word?) of the things that I can spend money on – well you would understand why I was in debt. It’s embarrassing to see your frivolity (still not sure if that’s a word but I like it) on paper. Let’s just say it shames you into doing something about it.
The “buffer” buckets encouraged me to save money, a little at a time, into those categories that inevitably caused me to use my credit cards. The theory was that if, over time, I built a buffer of funds that I could access when I needed (ie hospital visit forced payment of my annual deductible or more realistically, the spring line of Coach was introduced), I would be able to 1) curb my habit of slapping everything on plastic and 2) use the budget funds I had allocated to paying off my credit cards to doing exactly that. The buffer buckets I created were:
- Health Care Reserve – when I worked in the corporate world, I had a $600 deductible, a $30 co-pay every time I went to the doctor and a 20% co-pay for everything else until my out-of-pocket maximum was met. This fund was designed so that I could put a little away each paycheck. Then when it came time to pay my deductible at the beginning of the year – it was already saved up. (p.s. I have found health insurance in the private market to be much cheaper than my plan with my employer, but it’s a different thought process involved. As my typical style, I did lots and lots and lots of research, spreadsheets and comparisons. If you’re healthy, not trying to get pregnant, and are willing to take a bit of risk, private insurance wins. Surprising, huh? I know I was. I’ll post on this later in this series.).
- Christmas Fund – I set a budget at the beginning of the year and divide by 24 (my number of paychecks from January 1 through November 30 – obviously this may be different for you). We withdraw the cash at the beginning of December. We decide how much to spend on the kids, friends and family members. The rest goes to us to spend on each other. Britt gets ½ and I get the other ½. (Although I prefer to give it all to Britt – I’m generous that way.) This eliminates the Christmas hangover.
- Gimme Fund – We have a running list of things we want. Me – my list is loooooong. Britt – not so much. That man always amazes me at how little he needs. Of course, you size anyone next to me and they look like a minimalist. Anyways, we save for the next thing on the list. As soon as we have enough, it’s ours. If you followed my playroom/office combo series – the original $500 budget is an example of how this fund was used.
- Pet Care Reserve – we used to have a pug – Harley. He was a high maintenance dog. Wrinkle problems, eye problems, toenail problems, breathing problems. You name it and he had issues with it. So, we saved a little each month. Inevitably when he had to go to the vet, the money was there and it didn’t have to be put on the credit card.
- Happy House Fund – I am forever buying things for the house. I’m a closet interior designer. (Funny – that sounds like I design closets. You know what I mean). I try to re-arrange and re-purpose, but really, I just like to shop. This is a fund to help keep the spending under control. If the money is there, I buy it. (Sometimes I still buy it – but not as often as I used to.)
- Fun Money – money to spend on whatever my little heart desires – no strings attached. My favorite!
- Vacation Fund – Britt and I are travel junkies. I, specifically, suffer from wanderlust. This fund was designed to fuel that desire and help to be more disciplined in how often we traveled.
- Emergency Fund – no explanation needed.
- Freedom Fund –the original intent of this fund was really unknown. Britt & I were interested in buying or starting a business. Each time we found something we were interested in – we didn’t have enough money saved up. So I started the freedom fund – so we could be “free” from the 9 to 5 world. And it’s a good thing I had the foresight to do this. It is now what we are drawing on while I take my year off.
Each buffer bucket has a fixed amount to be contributed each month. I was paid twice a month, so some categories were funded twice a month, some just once a month.
I then went to smartypig.com and set up a special account for each buffer bucket. I also have separate “bank” accounts set-up in Quicken for each bucket. Each month I transfer the budgeted amount for each bucket to Smarty Pig and watch it build. This really helps me stick to my plan. The money is not easily accessible and you have to physically close the account to have the money transferred to your main account. This is intentional on my part. Another weakness of mine is that if something is easily accessible, I’ll take it.
Smarty Pig also has rewards associated with your accounts. For example, if you choose to have the money transferred to a Home Depot card instead of back to your checking account, you get 10% of your balance free. Hooray for free right. I’ve used this method with the Happy House fund. Also – they have a fairly good interest rate. More free money. Even more yay!
So there you have it. My buffer buckets. They work – they really do.
You may be wondering why I don’t have a pay off debt bucket. Well that is actually the easy part. You determine how much you have available to apply towards your debt each month and you do it. It’s a line item in your budget. The buffer buckets keep you on target so that you spend that money budgeted for paying off credit cards on exactly that and not on other emergencies or need-to-haves-at-that-very-moment.
So, as promised – here is an example of my budget before I took this year off and when I was paying down my debt. (I am currently not using these categories anymore since we are drawing from savings as our primary source of income this year. It doesn’t really make sense to contribute to savings when you have to pull from savings to do so. Although – that sounds exactly like something I’d do. Ha.)
I decided not to share with you the actual figures. I really love and admire bloggers who have the courage to share their finances – numbers and all – but I am not that brave. So, while you were probably hoping to see how much I made, I will have to disappoint you. Instead, I’m hoping this will give you something to leverage from in order to build a tool that works for you.
It will also serve as a guide for the next post where I’ll talk about how to compare your budget to your actual spending so that you can stay on track and what worked for me. You’ll see more how this spreadsheet comes into play with disciplining yourself (i.e. shaming yourself). This is more important than most people realize. Sneak peek – stop using auto pay.
Do you have a budget? Is it written or electronic?
Have a blessed day. See you next post.