Our Approach to Finances: Debt Snowballs, Emergency Funds, and Envelopes:
My husband and I have made great progress in decreasing our debt and putting ourselves in a much better situation financially but it definitely required effort. We tried several of the systems and plans out there and while nearly each one had something that we found of value for our situation there wasn’t any one that we felt was perfect for us. So, we modified them to make it a good fit. You can do the same.
I’ll share with you how we came to be where we are today but ultimately you and your family will have to do what is best for you.
First, we had to establish where we were financially.
The problem most of us have is that we blindly pay the bills each month never truly letting it sink in just how much money is owed to a particular company or worse, do you even remember what it is that you purchased on credit and is it still benefiting your family? When we finally started asking these questions when the bills came rolling in we were a bit sick to our stomach. Yeah, we were still paying for Christmas 2 years ago. The blender that shattered three months after we bought it – check, still paying for it. And what about the clothes the kids had outgrown? Yes, that was also earning lots of interest for the credit card company.
Once we had that gut check we wrote down principle balances for the debt we had. We also wrote down the interest rate, when it was due, and the payment amount. Then we wrote down estimates of what we spent for tithe, groceries, gas, utilities, and other required expenses. Once we had a total on all of our debt plus expenses we subtracted it from our monthly income. This clued us in on where we stood financially.
Second, we trimmed spending.
We cut out all unnecessary expenses until we felt we could afford them. That meant that we no longer charged anything on our credit cards, we canceled monthly plans like Netflix, texting & data plans (yes, it was difficult), cable TV, magazine subscriptions and anything else that automatically withdrew from our account or was automatically charged on our card. Something else we did was view the history on our checking account to see how much money we had been spending on grocery shopping, eating out, going to movies, and other similar things. Once we knew what we had been spending it was easy to cut back. We did have to change the way we did a few things. We started shopping the sales and using coupons but don’t worry, you can save money without using coupons too. For larger items we budgeted what we were willing to spend and shopped Craig’s List, garage sales, and thrift stores. We purposed not to go into debt for anything else. There were a few exceptions but we’ll talk about those later.
A major help in cutting costs was following blogs that did the research work for me. Money Saving Mom is my go to site for all things frugal and financial. You can find a wealth of knowledge there. Just glance through her series and “start here” section. You can also find location specific deal blogs and follow them. I follow My Baton Rouge Mommy because she lets me know of all the latest and greatest local deals. Just do a search for deals in your closest metropolitan area.
Third, we increased our income.
My husband began working overtime whenever he was given the opportunity and he operated a small computer repair business on the side. When I realized that I only had a couple years left before my boys left home I put my career as a marketing strategist on hold to be at home with them. In order to make up some of the income difference I began monetizing my blog, selling planner printables on Etsy and Teachers Pay Teachers, and I designed websites. I also wrote a book, Pursuit of Proverbs 31, that continues to bring in royalties.
The big one: save $1000 for emergencies!
I speak with passion on this one but only because we have experience with just how necessary it is. When we started our journey we were both earning a decent income and my husband received bonus every year. We didn’t think it would be a big deal if we had skipped this step but we did it anyway. I’ll admit it was for prideful reasons. Even though we were in debt, my husband and I had never, ever dipped below a certain amount in our checking account. We always had that cushion money so we saw this as additional cushion or security. Boy am I ever glad we had it.
Just a few months after we put that money in the bank our world fell apart. My husband decided to take a new job, one that promised more money than he was making. During the transition to that job the economy took a nosedive and the promise of a higher salary went out the window. He wasn’t making more money at that new job. He was making less but at that point it was too late to turn back. I was also homeschooling at the time and wasn’t able to work from home as much as I had been. We were in a bind.
The money that we saved, the corners we cut, and the budget we put in place carried us through until he found his current job. Without that emergency fund we likely would have ended up like so many others: in foreclosure. So whatever you have to do to save it, do it. You can’t afford not to. Sell things. Work a few more hours. Do whatever you must but put that $1000 in the bank.
Next, we created a budget and used cash (the envelope system).
Two of our favorite systems for getting out of debt and having financial freedom are from Dave Ramsey and Crown Financial. Both are advocates for using the envelope system and after applying it to our daily life, we are too. Before creating our budget we did three things:
- Figured out how much additional money we could put towards debt.
- Filled in and printed out the Accelerated Debt Payoff Calculator. Place a copy of this in your household binder.
- Decide which categories and sub-categories would be put into our budget.
We filled out our budget form and then made pretty envelopes to hold the cash for things like groceries, fun money, clothing, home repair, etc. Each pay period we put the proper amount of money in the envelope, added it to the ledger that is on the envelope and stored it in a safe place. When we needed it for say groceries, I would grab the grocery envelope and count the money inside (sometimes there was money left over from before) to make sure it matched what was on the ledger. Whatever was in the envelope is what I had to make last until the next pay period so I would shop within that budget. Once I spent some of the cash then I replaced it with a receipt and deducted it from the ledger. The ledger kept us accountable so I found that very handy to have. Another benefit of only using cash is that I second guessed every item I picked up to purchase. I would ask myself if there was an equivalent that was less expensive or if it was really necessary.
Our budget changed as we paid off debt. Each time a new debt was paid off (we started with smallest balance first then worked through) then we took the amount we paid on that debt and added it to a new debt. For example, we determined that after canceling subscriptions and cutting back on spending that we could put an additional $200 towards our debt so we paid the $200 plus the minimum payment toward the debt with the smallest balance. That is the beginning of the debt snowball. We paid that amount until the debt was paid off. Once the first debt is paid off we took the amount we were paying on it (about $50 for the monthly payment plus the $200 debt snowball for a total of $250) and we paid that along with the new minimum payment towards our next smallest debt. So basically if the second debt’s minimum payment was $30 then we paid that plus the $250 for a total of $280. We paid that until the debt was paid off. The debt snowball continue from there.
Exceptions to our rules.
Like I stated earlier we had certain exceptions to our rules. One of those rules what that each year when the big home improvement store had their 6 months same as cash option going on then we took advantage of it. We would make a big purchase for something like new carpets and we’d charge it without having to pay interest for six months. We always paid that off in full, before interest was applied. That was one way we knew we could charge without paying extra for it. We feel that home improvement is a necessity and this was a viable option. I know others would advise against this but it is a choice we made and it has worked for us. Again, you must do what is best for your family.
Our other exception was taking a family vacation each year. Some years that was just a trip to Florida but we found that it was more beneficial to us to have that time together as a family and away from work and responsibilities to just enjoy each other.
Financially, we are much better off today than we were just two years ago but we still use most of these principles to have financial freedom. We save for big things, buy previously adored items, and shop for the best deals. Keeping financial records is what made all of this possible. We still have some debt to go but we are on track to have everything (including the mortgage) paid off in a few years. I’m pretty excited about that.
I created this Financial and Budget Printables Kit for my Household Binder so I could stay organized when it comes to our finances. After making copies for many friends and giving away some of my original sets here on my blog, I decided to add a new design and sell them as well. This kit comes with more than 60 printables to help you on your way to financial freedom! All of the printables, with the exception of the cash envelopes, are 8.5 x 11 printable pages. It was specifically created to be lifelong so you customize years, dates, and other information for countless printing. You do not need to purchase another planner again unless you want to. You can purchase it here: Financial & Budget Printables for Personal Finance and Home Management Binder – 60+ Editable PDFs.