Debt-Free Forever (5 page)

If you’re a chick, I’ll bet dollars to doughnuts you’ve experienced something like this: you’re out shopping and see a lovely (fill in the blank). You stop and have a look. Your girlfriend says, “Nice!” You nod at each other. But you’re not sure. It isn’t really something you need, and you are trying to save for that vacation you’re planning with your best buddy. Hmm. What to do, what to do? She says, “It’s fabulous, and what a great price. You can’t pass it up.” You nod again. It is fabulous. And it is a great price. So out comes the credit card and into a shopping bag it goes. You’re now the proud owner, and she gives you a wee pat on the back. You’re a team!

Where was your goal? Where was your self-control? Oops!

One of the hardest things to deal with once you decide to live on a budget, change how you’re using your money, and modify your life is finding people who are friendly to your new goals. Some of them won’t mind a bit. Some will congratulate you. And some will think you’re nuts to pass up on today’s pleasures for something in which they have no stake or to which they cannot relate.

Peer pressure is a particularly hard issue to deal with when one person in a partnership is committed to meeting the goals set while the other is swayed by chums who love to have it all now.

Carlie and Doug are both hard-working parents of a young son, Mathew. Doug has been carefully managing his money since Moses was a lad, but Carlie has been more of a free spirit. She works as an interior designer so shopping is part of what she does for a living. Carlie has a difficult time separating “work” shopping from “home” shopping, and the debt is driving Doug bonkers. When Mathew came along, Carlie had a whole new reason to shop.

To make matters worse, Carlie hangs out with a couple of “rich chicks,” as Doug calls them. These girls earn considerably more than Carlie, can buy whatever they want, and love to travel. And they always ask their friend Carlie to go along with them. Carlie is resentful that she can’t do all the things her girlfriends are doing. She feels trapped. She wishes Doug earned more money. Doug is resentful that he goes without things so Carlie can have what she wants, and then she still bitches at him because he’s not bringing home more money.

They fight. They fight about Carlie’s shopping. They fight about how much stuff Mathew should have. And they fight about the next trip Carlie is planning with her posse.

Doug doesn’t want to tell Carlie that she’s going to have to find new friends because her old ones are bankrupting them. But that’s what’s happening. Carlie’s last trip is still on her credit card at 18.9%. And the gorgeous mirror she found when shopping for a client is hanging in the front hall but hasn’t been paid for either. And now Carlie wants to put Mathew into private school. When Doug asks her where the money is going to come from, she yells at him, accusing him of not wanting the best for his son. Doug is hurt, frustrated, and angry.

Any of this sound familiar? Do you have a partner who seems to be from a different planet when it comes to how you manage your family coffers? If you and your partner are at odds, if one of you is allowing peer pressure to throw the family budget out of whack, you better sit down and figure it out fast before you end up divorced and broke.

Once you set goals for yourself and decide that shopping isn’t on your list anymore, you may have to rethink who you’re hanging with. People who aren’t friendly to your new goals won’t consider for a minute how their own spending patterns may be difficult for you to deal with. They’ll say, “C’mon, we haven’t been out for dinner in weeks” or “We’ll just go for a couple of drinks” or “You need to spoil yourself once in a while.”

People who are friendly to your goals, and are working to achieve their own dreams, will help you to stick to your plan. They will know that you’re working hard to make changes and they’ll support you.

Just because you’re watching the money now doesn’t mean you can’t have fun. Having a fun night out doesn’t have to cost a fortune. While people who are not friendly to your goals may want to blow $100 on baseball tickets, your goal-friendly friends will be quite happy with a night of Scrabble and a pot-luck dinner. Yes, you’d have a great time at the game. And your pals may even offer to spring for your ticket cuz they love you. Then you’ll feel you have to go, spending gobs for parking, food at the stadium, treating them to drinks after as a thank you, and paying a babysitter.

Goal-friendly friends will be willing to point you in the direction of the best deal, along with ways to cut costs and
have fun for free. They’ll remind you of just how rich life can be without constant consumption.

I’m not suggesting that you have to get yourself a whole new set of friends; I’m just trying to point out how peer pressure can mess up even the best-laid plans. If you’re committed to achieving the goals you’ve set for yourself, you’re going to have some ‘splaining to do if you want people to understand your new headspace. And if the pressure to spend is more than you can bear, then you’ll have to choose carefully where you see those friends so you don’t do yourself too much damage!

If your initial stabs at setting goals feel strained and uncomfortable, that’s normal. The first time you drove a car, your braking was jagged and your steering left a lot to be desired. The first meal you cooked probably didn’t rate four stars. And who among us hasn’t turned someone’s socks and underwear pink because we were less than perfect at sorting our laundry? Goal setting is a skill and it takes time to get good at it. It also takes practice.

It’s worth it. Learning to set goals will help you focus and concentrate your time, energy, and resources on what it is you really want to achieve. It will help you deal with obstacles, struggles, and failures because you have a clear picture of what you want. And instead of going with the flow and letting the whim of the moment or someone else’s interests determine where you end up, you will be consciously deciding which way to go to get to where you want to be.

Learning to set goals is a life skill, like learning to budget and learning to create a debt repayment plan. It may not be the thing you
looove
to do, but it is one of the things that will help you create the life you want to have. So do it!

I
n Chapter 1 you figured out where your money has been going. Now it’s time to make a budget that will work for you.

There are three rules for your budget:

1.
You can’t have a negative number at the bottom. It has to be positive or zero; the budget has to balance.

2.
You must save something. Money has to go into your emergency fund and your long-term savings every month for you to have a balanced financial plan.

3.
You must be making more than the minimum payment on your debt to get out of debt.

Use the Budget Worksheet on page6291–93 for your calculations. If you want to use the Interactive Budget Worksheet at www.gailvazoxlade.com, it’ll also help you figure out what
ends up going in the Magic Jars, if you decide to use them. If you want to create your own budget, feel free to do so. Use the categories from the Budget Worksheet as a guide.

If you choose to make your own budget, don’t make one with so many categories that you drive yourself crazy trying to actually use it. Detail was very important when it came to doing the spending analysis. Ease of use is paramount when it comes to actually using a budget. If there are too many categories, you’ll get tired of entering in the detail and stop using the budget. You have to strike the balance between detail and ease of use that works for you. And remember, a budget is a changing thing, not a plan cast in concrete. Just as your life changes, so must your budget.

One of the features of the Interactive Budget Worksheet on my website is that it calculates the percentages for each category in which you’re spending your money. I call this the Life Pie. This is useful for seeing how well balanced your budget is and where you may be overcommitting your resources.

According to the Life Pie, 35% of your money should be spent on Housing, 15% on Transportation, 25% on Life, 15% on Debt Repayment, and 10% on Savings.

Housing consists of your rent or mortgage payment and taxes, utilities, maintenance, and home insurance. If you add up the amount you’re spending on these categories, divide it by your net income and multiply by 100, you’ll get a percentage. If the percentage is more than 35%, you’re house poor. Either you have to make more money or you have to spend
less in another category to have the extra available for housing. Ultimately, when you add up all the pieces of the pie, the total can’t be more than 100% of your income.

Transportation consists of your car payments, whether a loan or a lease, insurance, licence, gas, repairs, public transit, cabs, highway tolls, and whatever else you may pay to get from here to there.

The category people have the most difficulty getting their heads around is Life. I’m always being stopped and asked about how much a body should be spending on food, clothing, and all the other stuff that goes into the Life category. I don’t have a definitive answer since it depends on what you can afford. If you make a little, you spend a little. If you make a lot, you can spend a lot. You have to prioritize. You have to make choices.

GAIL’S TIPS

The percentages I give are guidelines. If you’re spending nothing on debt repayment—yeah!—that means you have 15% to stick in any of the other four categories. But if you’re over the top in one category, it means you’ll have to cut back on the others. So what if Life is 50% of your spending? As long as your budget balances, you’re saving at least 10%, you’ve got no debt, and you’re happy, you’re fine.

Let me take a minute to clarify a huge misconception that seems to have sprung up around the Debt Repayment
category. The Life Pie guideline is 15% of your income. But what that actually means is if you are spending more than 15% of your income paying off your consumer debt, you have far too much debt. It does not mean you should only put 15% of your income to debt repayment.
You need to put as much of your income into debt repayment as necessary to get all your consumer debt paid off in three years or less.
And if that means your debt category is up to 25%, 30%, or even 40% of your income, so be it. You’ll just have to cut back elsewhere or make more money to have enough for the other categories. If you’ve dug yourself a deep hole by spending money you haven’t yet earned, it’s time to grow up, suck it up, and pay it off! More on this when you get to Chapter 5.

As you work to create your first budget, don’t think that everything is going to fall into place tickety-boo. There’ll be a lot of tweaking required to get it right. And it may mean you have to put the budget down, go away and do something else for a while, and then come back to it to refine it further. When I am creating budgets for families, it takes me several tries to come up with something that I think will work. (It only looks easy.)

Having completed your Spending Analysis Worksheet (page6621–23), you know what you’ve been spending on average in each category, so start by plugging in those numbers into your budget. For any expenses that didn’t get caught in your spending analysis—things like house and car insurance that are paid annually, or perhaps property taxes—figure out what you pay in a year and divide by 12. That’ll give you the monthly amount for your budget. (Yes, even if you pay it annually, you have to put it in your budget!)

If you’ve been spending a ton of money in cash, you won’t be able to remember where it all went. To get a handle on how you spend your cash, get a notebook and write down every penny you spend in cash over the next month. At the end of the month, add the amounts to your budget averages that you took from the spending analysis you did in Chapter 1. So, if you ended up having coffee 37 times that month, you’d add the $90.65 to the Restaurant category on your budget sheet. And if you bought two new pairs of jeans and a couple of packs of skivvies, you’d add the $212.37 you spent to your Clothing category.

The previous exercise is a good one if you spend more than 15% of your income in cash, since it will give you a clearer picture of where you like to spend your money. If you’re currently dropping $700 a month in cash without a clue as to where it’s going, it’ll be pretty hard to see where you need to cut back to make your budget work. Track your cash and face up to the truth about how you’re blowing your dough.

As far as the Debt Repayment category goes, right now you need to stick a number in that gives a nod to your debt repayment plans. The number will very likely change as you go through the process. Since you’ve already added up what your minimum payments must be to keep your credit history from getting bruised, drop that number into the budget.

Next put in your income. Enter the amount you’ve been
putting into the bank every month. (You figured this out when you did your spending analysis in Chapter 1. If you skipped this step before, you have to do it now!) This number has to be what’s actually been going into your account, not what you imagine has been going in. If you’ve fallen into the trap of thinking of your income in gross dollars (before taxes), it’s time to stop that nonsense. Your gross income is yours and the government’s income. If you want a budget that works, you have to work with your
net
income: your income after deductions.

You only have so much money to spend. Up until now, you may have been unwilling to accept that you only have so much money to spend, so you used credit cards, lines of credit, and whatever other forms of financing you could get your hands on to keep shopping. But the reality is … say it with me … you only have so much money to spend.

Once you enter all the averages you came up with the Spending Analysis Worksheet into your budget, if you can’t make it balance—if the number at the bottom isn’t a positive or a zero—you have a problem. You’ve been spending more money than you make for one of two reasons:

1.
Your expenses are too high.

2.
Your income is too low.

Or maybe it’s a combination of both. You need to assess what the problem is so you can fix it.

People think there’s some mystery involved in balancing a budget. There isn’t. It’s simply a matter of taking what you
have and divvying it up in a way that works for you. And if you can’t afford cable, you can’t afford cable.

GAIL’S TIPS

Some things are very important, some things are a little important, and some things aren’t important at all. This is when you figure out for yourself which is which.

You have to pay to keep a roof over your head, so rent, mortgage, property taxes, and utilities are all essential expenses. They are “need to have” expenses. Food is an essential expense since you have to eat. But steak is a “nice to have” when it comes to how much you’re going to allocate for food. If you can afford steak, you can eat steak. If you can’t, you’ll be looking for a cheaper way to fill your belly by focusing only on what you “need to have.” While food is an essential expense, how much you spend on food is “variable” (it can change) depending on your resources.