This is the 5th post in the Debt Repayment Plan Series! If you’re new to this series, start here.
I’ve touched on a couple different topics relating to budgeting and spending as we prepare our debt repayment plan. Today I want to go more in-depth about a specific topic: controlling your spending. Basically, don’t spend money you don’t have. This means several different things to me: don’t borrow from yourself, having or creating an emergency fund, defining emergencies, and ultimately living within your means.
So what are we going to look at today?
- Looking at your financial history
- Living within your means
- Not living on next month’s income
- The importance of an emergency fund
1. Looking at Your Financial History
I’ve touched on this before, and I think it is so important I’m bringing it up again. If you want to make positive future changes, you need to look at your past. This includes mistakes you’ve made, that you learned from your family, and more. I mentioned several things I learned from my family (mostly poor money management strategies and what not to do). The abbreviated version is my family struggled with significant debt throughout my entire childhood. Having this constant strain around me gave me some serious anxiety.
If you can come up with no other reason to be debt-free, think of how it impacts your children.
Through my negative experiences, I learned many things, including that I never want to owe anyone money, I want to be financially comfortable, I don’t want to have children when I’m in debt, and to never spend money I don’t have on hand. These things eluded me in college, though I never carried a balance on my credit card. It wasn’t until I was trying to make my 47th budget, that I finally look a hard look at my past and realized how my past was effecting my money management skills.
So take a minute to think back on your history-go back as far as you can remember. Use this time to ask yourself the following questions:
- What did you learn about money from your family?
- Why are you wanting to change?
- Can your purchase wait?
- Why do you want to buy it?
If these answers surprise you, don’t be scared. This is a good step to making a change (and figuring out the direction).
2. Living Within Your Means
My guess if that if you’ve ended up here, you’ve probably researched budgeting to some extent. There is one completely universal rule in budgeting (and I bet you can guess what it is)-living within your means. You may not have seen it written exactly like that, but all it means is spending less than you make. Period. Always.
How does this apply to debt, you ask? Well, if you want to get out of debt, you have to stop adding more. If you are spending more than you are bringing in, you’re adding more debt. This is a vicious cycle that will not end well.
Now take out a piece of paper (or a notebook) and a pen, and get ready to use them! If you haven’t already, get ready to track your spending. If you have, write down how much you bring in (income) and how much you spend (expenses). If you subtract your expenses from your income and get a negative number, you’re in trouble. You need to get your spending under control, like yesterday.
3. Don’t Live on Next Month’s Income
Don’t borrow from yourself. This practice is what I affectionately refer to as “living off next month’s income.” If you cannot go to the bank and withdraw what you need to buy whatever you’re thinking about, you cannot afford it. If you put it on a credit card and pay for it with your next pay check, you’re stealing from your future self. You’re starting off your next paycheck with less money and making your budget tighter. Another example of this is taking money out of your savings account (not to be confused with your emergency fund).
Most likely, at some point the idea has crossed your mind. This is the entire practice is the basis of credit card companies: “I don’t have the money now but I will when I get paid again, so I’ll buy it now and pay for it later.” I’ve definitely been guilty of this in the past, so please learn from my mistakes. Unless it is a true emergency and you don’t have an adequate emergency fund, there is no way to justify this behavior.
Speaking of emergency funds…
4. The Importance of an Emergency Fund
If you are unfamiliar with this term, an emergency fund is a designated stash of money to help you in the event of an emergency. The most recommended rules are a minimum of $1,000, or enough to cover 3 to 6 months worth of expenses.
The purpose of an emergency find is:
- to help you prepare for a crisis,
- prevent you from borrowing from yourself,
- and to help you in an emergency.
Building an emergency fund is super important to keeping your budget, and ultimately your debt repayment plan, on track. Without it, that debt-free date we calculated is not going to be accurate.
I’ll be the first person to admit building an emergency fund feels nearly impossible when you’re on a tight budget. I’ve been there- In high school, I wiped out my savings account paying my family’s electric bill, then I got a flat tire the same week. Because I had literally just wiped out my savings account, I had to put a new tire on my credit card (I paid it off immediately with my next check).
In times like that, it feels like you can not get ahead. Even when life feels bleak, you have to make a plan and commit to that plan. Even if you can only contribute $5 per paycheck, make a commitment to set that money aside to start your emergency fund. Anything is better than nothing.
On another note, it is important to take the time to define what an emergency looks like for your family. If you don’t have a set definition of an emergency, you’re more likely to convince yourself to use that money. So take a moment to think about what are good reasons to use that money.
Some examples of my definition are: medical bills, emergency vet bills, major house repairs (like a tree fell on the house), insurance deductibles, etc.
- Really look at your financial history.
- Live within your means.
- Don’t live on next month’s income.
- Commit to building an emergency fund.
- Know when, and when not, to use your emergency fund.
Thanks for stopping by!
What part of spending is most troubling for you?
Check out the next post, Making Better Financial Choices.