Does income matter?

In a post I created last week, a follower of my blog brought up the topic of income effecting how someone can pay off debt.  I thought it might be fun to give my opinion on this:  For the most part I disagree, let me explain why I think this…

People need to live within their means (don’t spend more money than you can afford to).  Unless your income is literally less than what it is possible to live off of, you should be able to pay down your debt.  Just like comparing the financials of companies of different industries, you need to look at budgets in a percentage aspect.  The general percentages of bills from your income tend to look something like this:

  • Savings: 9%
  • Housing: 33%
  • Utilities: 10%
  • Food: 10%
  • Transportation: 12%
  • Clothing: 3%
  • Medical/Health: 5%
  • Personal: 8%
  • Recreation: 7%
  • Debts: 3%

So let’s use this example and apply it to a few different income levels and look at these figures on a monthly basis (the budget is after estimated taxes have been removed).

$30,000 Income:

  • Savings: $169
  • Housing: $618
  • Utilities: $187
  • Food: $187
  • Transportation: $225
  • Clothing: $56
  • Medical/Health: $94
  • Personal: $150
  • Recreation: $131
  • Debts: $56

$60,000 Income

  • Savings: $338
  • Housing: $1238
  • Utilities: $375
  • Food: $375
  • Transportation: $450
  • Clothing: $113
  • Medical/Health: $188
  • Personal: $300
  • Recreation: $263
  • Debts: $113

$75,000 Income

  • Savings: $422
  • Housing: $1547
  • Utilities: $469
  • Food: $469
  • Transportation: $563
  • Clothing: $141
  • Medical/Health: $234
  • Personal: $375
  • Recreation: $328
  • Debts: $141

$100,000 Income

  • Savings: $563
  • Housing: $2063
  • Utilities: $625
  • Food: $625
  • Transportation: $750
  • Clothing: $188
  • Medical/Health: $313
  • Personal: $500
  • Recreation: $438
  • Debts: $188

Obviously there is a big difference in housing budget of someone making $30k/year compared to someone bringing in $100k/year – almost $1400 per month, actually.  But that doesn’t mean they should be living the same lifestyle.  A person making $30k could buy a house for nearly $75,000 (and there are plenty of nice homes in this price range for sale in my area) while someone making $100k could buy a house costing nearly $250k, all while using up the same percentage of their income.  See what happened there?  The problem is this: Too many people with an income of $30k try buying a house that costs $100k+.

What are your thoughts?

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I hate budgets, you probably do to…

If you were anything like me, it is hard to save because its depressing creating a budget and it’s a royal pain in the @ss following that budget.  You’ve probably run into this situation before…  Someone asks you to meet for dinner and you ask yourself, “What is my limit for going out to eat?”  Your response is something probably like, “I don’t remember what I have left.”  At this point you get a bit upset and say screw it!  Right?  Well, I have a solution for you that worked for me…  Daily budgets.

How would a daily budget make things any easier?  Well, it breaks things down to bite sized chunks for you to remember.  Let me tell you how my wife and I do it.  We figured bills like our mortgage, electric, water, etc. can’t be “budgeted” in a sense, meaning they need to be used and paid regardless.  We determined the average for each of these bills and used that number to determine our daily budget.  We then decided how much we need to save and subtracted that from the remainder of our income.  At this point, we decided how much we can spend on stuff like clothing, restaurants, etc. and divided it by ~30 days in a month, coming to our total daily budget.  Now divide that number by two (we have to split it), and there you have it.  Let me show you what I mean, in an example using made up numbers:

Monthly Income: $2,000
Mortgage:
-$800
Electric: 
-$50
Water: -$25
Savings: -$575
Remaining Income: $550

$550 divided by 30 days = $18.33/daily

$18.33 divided by 2 people = $9.16/daily maximum per person

Now that we’ve arrived at our number of $9.16 daily budget per person, we wanted to make sure we cut it back because some months have 30 days, some months we might be a little tighter on money for some reason, etc.  So we called it $5 per day per person because we knew we could afford that.  Each day we can spend up to $5/day each and roll over the remainder for that week only (rounded to the nearest quarter), which we track on a small dry board on our fridge.  So let me give you one more example of how this might look, using my budget (not my wife’s):

Sunday – $5 budget/Spent $3
Monday – $8 budget ($5 plus $3 from the day before)/Spent $4
Tuesday – $9 budget (you get the idea by now)/Spent $2
Wednesday – $12 budget/Spent $5
Thursday – $12 budget/Spent $3
Friday – $14 budget/Spent $6
Saturday – $13 budget/Spent $12 (losing $1 for the week that doesn’t roll over)

We’ve both tried the typical monthly budget, the cash only purchasing, and so many other ways to save and none of them worked.  We created this on our own and it is wonderful!  Using this budgeting strategy while following the Promises you made to yourself will help you get out of debt quick!

Post any comments or questions you have about our daily budget!

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No more car payment… EVER!

In my last post I talked about developing a strategy for fighting off my debt – I said I would pay off my credit cards, then my car loan, then my student loans and finally, my mortgage.  I got my credit card loans paid off pretty quickly, it only took a few months.  I applied my promises and paid an extra $1,500 to my credit card payments until they were gone.  And as of yesterday…. wait for it, wait for it…  My car loan is PAID OFF!

I applied the same principles – make sure I have the extra $1,500 each month before doing anything else and applying it to my “targeted debt.”  If you remember, I started with a car loan of about $15,000 (right under, actually) and a car payment of $356 each month.  But I also added the $1,500 to that payment and mailed a check of $1,856 each month for 9 months.  Earlier this week I mailed my last check of $1,604.52 for the payoff and it was credited yesterday!

So many of you are probably thinking “okay, great.  He paid off his car and won’t have to worry about payments again for 4-7 years when he buys a new one.”  WRONG!  I am now going to change my saving habits a little, let me explain.

The average person pays about 8% interest on a 5 year auto loan.  If you were to purchase a brand new, very reliable, nice car for $20,000 and make only the required payments – you would pay about $4,350 over the life of the loan, or $72.50 each month.  And the average person has an auto loan for their entire life.  So what am I doing differently?  I am making my auto loan payments to myself, interest free.  I am now going to save an extra $300 every month for a car fund (My $356 car loan payment minus interest rounded to $56).  If I continue to do this over the next 5 years I will have $18,000 saved, not including any interest I make on the money.  Assuming I can trade my car in for $8,000 (which is the average trade in price of the same car I have but 7 years old now), I will have $26,000 to spend.  If I continue to rinse and repeat this for the rest of my life I will have saved enough interest to buy my car in cash TWICE!  Think about that for a second…  $75 a month saved, forever!

After all that I can now add the $56/month I am saving on interest into my student loan payments, for an extra $1,556 paid each month.

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Promises

The title of my blog is “10 Years to Debt Freedom” but I have a confession to make…  It is really 9 years to debt freedom.  You see, I started my journey to being debt free last year when I developed my plan.  I would pay off my credit cards first, followed by my car loan and then student loans.  After all else was taken care of I’d tackle the hardest part of them all – the mortgage.  Part of designing my plans was to make a few promises to myself, and my wife:

  1. Pick a realistic number that can be ADDED to a payment I am making and pay it before doing anything recreational.  For example, I wanted to put an extra $1,500 toward my debts every month.  At the beginning of each month I first built my savings account up an extra $1,500 before going out to dinner, going bowling, etc.  I then made all my monthly payments and added the $1,500 to my car loan for a total payment of $1,856 each month.
  2. Don’t take out a loan or use credit unless it’s 0% interest and you have the cash to pay it off.  My wife and I needed to buy a new bedroom set but we waited until we saved to go buy it in cash.  When we found the one we liked we decided to buy it with store credit at 0% interest and set up an automatic payment to pay it off in 6 months – to ensure we didn’t pay interest after out 12 month, no interest period.  Why did we do this?  I have some of my saved money invested and I was averaging a 16% return on it.  So by leaving my money invested and slowly taking it out as I made each monthly payment, I was actually making money.  You can do the same.
  3. Put away a small amount each month for an “oh $hit” fund.  Bad things happen, and you can either anticipate them happening or pretend they never will – but they always happen.  Just a couple weeks ago my wife walked out to her car after work and found out her tire was flat and it couldn’t be plugged – that was a $160 unexpected purchase.  I anticipate a few hundred dollars of unexpected things are going to happen each year so I save $50 a month for it.  I also save a little bit extra for ‘fun’ purchases that I want to make, like vacations or new clothing.
  4. Don’t get distracted.  Saving money and paying down your debt is just like going on a diet.  You see your friends buy nice things on credit or take out a loan so they can go on a vacation and your first instinct is to get a little jealous.  Just remember, in 10 years when you don’t have car payments, credit card payments, or a mortgage your friends will be jealous of that, and the vacations and nicer things you will be able to buy because you pay no interest.

Get started on the first step to 10 years to debt freedom and make yourself these promises, you can do it!

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Why create a blog to tell you my 10 year financial freedom plan?

Hello everyone, I’m Joe!  I’d like to tell you my story in the hope that it can inspire you to change your life.  10 years ago I made the decision to move 1/2 way across the country with the hopes of opening a restaurant with my uncle – all while I was 17 years old.  I quickly learned that working with family wasn’t a good idea and found myself jobless, broke and on the verge of being homeless. After a couple years of taking whatever job I could find to pay the bills – waiting at a restaurant, plumbing, retail, working at a call center, etc. – I found myself in quite a bit of debt because my jobs weren’t paying enough to pay for ALL my bills.  When I pulled my credit and saw a scary number, roughly six months worth of income, I decided that I should join college and try something new.  This blog isn’t intended to teach you about going to school or getting a job, but this is important in my journey. It took me almost 6 years to graduate because I was working full-time and going to school full-time, so I could only take 3 or 4 classes at a time and couldn’t always take summer classes.  6 years worth of college resulted in a ton of debt…  About $50,000 worth.  By the time I graduated I was in about $75,000 in debt.  ($50,000 college loans, $15,000 car loan and $10,000 in various other debts).  That’s right, Seventy-five Thousand Dollars!

I worked hard to get a decent job after graduating – making enough money to pay my bills and have some entertainment money all while paying a little bit of debt.  After saving a little bit of cash and buying a house, I then realized I was now in $235,000 debt (including the $170,000 mortgage).  After I added up all my debt I decided to take the way I live in my own hands and to no longer rely on banks to live – I created a 10 year plan to do so.

This blog is to tell you how I do it and  I hope to inspire you all get debt free too!

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