Hey everyone! Today I have a guest post for the fifth week of my debt payoff series (the other three posts were How I eliminated my debt in less than 1 year, How We Handled $32,000 in Student Loans, Getting out of debt … with a plan and Debt Repayment is My Middle Name).
I asked readers and friends to submit guest posts regarding anything relating to their debt. Enjoy! If you would like to participate, please e-mail me at senseofcents@gmail.com.
Today’s post is about how a reader created a budget to pay off their debt. Also, don’t forget to read about my wonderful $38,000 student loan plan and what I’m doing to aggressively get rid of them. I’m getting closer and closer to the payoff and it is such a GREAT feeling.
The proverbial mechanic who drives a broken down car.
The contractor with an unfinished basement.
The hair stylist with roots.
What do these three have in common? They are all professionals who don’t follow their own advice.
I used to be one of them – a CPA in debt. Big debt. I have always liked to spend. I remember when I bought my first car (actually it was a truck.) It was an impulse purchase. Had to have it. Didn’t care about the financial consequences.
And that’s how it was. If I wanted something, I bought it. It didn’t matter whether I really needed it, whether I could afford it or what it meant for my financial future. My philosophy was easy come easy go.
Until the easy go exceeded the easy come
My reckless spending habits eventually caught up with me. I had so many credit cards that I was pulling cash from an ATM with one credit card so I could make the minimum payment on another credit card. My entire paycheck was going towards my credit cards. And thus the cycle continued.
I read book after book after book on getting out of debt. I followed all the advice and rules, but nothing stuck longer than a couple weeks. And always at the end, I would be further in debt. Just like a diet. You lose a little weight, but then you gain it back – plus 5 pounds.
I woke up
And one day, I woke up! I realized following the rules and applying conventional wisdom wasn’t working for me. In order for me to triumph in the war against debt, I needed to find creative ways to satisfy my cravings. I needed to turn my weaknesses into my strengths.
I painstakingly captured every expense in Quicken for 3 full months. YES – three months!!! Why three? I needed to capture my natural spending habits over multiple payroll cycles.
At the end of the three months, I performed a very difficult and honest self-analysis of my spending behavior. I ran a report in Quicken detailed by category. By reviewing the report I could identify my spikes in spending and determine why they spiked (i.e. what was going on in my life at that time). I did the same for the peaks when I was acting financially responsible.
Budget
I then created a budget based on those peaks and valleys. I created budget categories that catered to my flaws. For example, every time I tried to restrict my spending – you know – be all financially smart and perfect – that’s when I spent the most. So I created a “Fun Money” budget category. That was money I could spend on whatever I wanted. No questions asked.
I stopped trying to save money by eating in. I created a “Dining Out” budget category and allowed myself to go out with my friends and family without the guilt attached.
I also created budget categories for areas in my life where I knew the inevitable binge would occur. For example, I have an insatiable desire to redecorate my house. So I created a “Happy House” fund. I put a little away each month. When the craving for a spending spree reared it’s ugly head, I was prepared. I had money saved.
For expenses that fluctuated each month, I kept a flat budgeted amount and treated it like a reserve. Heat, for example. In the summer the heat bill was low thus I wouldn’t spend everything I had budgeted. I would roll those “left-over” funds forward until I needed them in the winter months.
Debt Pay-down
Finally, I had a budget category for debt pay-down. I focused all my efforts on one credit card at a time. When that credit card was paid off, I applied that much more to the next one. I started with my smallest credit card debt. Not the one with the highest interest rate. The purpose was to gain momentum. You know, the infamous snowball effect. (I have learned that I will never beat psychology – so I have chosen to run along side it.)
The final play in my Super Bowl against debt was tracking actual spending against my budget with unrelenting persistence. Every couple days, I tallied all my spending against my budget. At no time did I not know my exact financial position. This tactic eliminated any compromise to my plan because I could not fool myself into thinking I had more money available than I really did.
And finally, finally, finally – that day came. I made my last credit card payment. I was debt free.
Beyond the ability to say I was debt free (with the exception of a mortgage and a car payment), two great things happened to me as a result of this process. One, I had built an arsenal of good financial habits. Those habits turned into an ability to save. And two, that savings led me to be able to take a year off work and stay home with my family.
Was it hard? Heck yeah! Nothing in my life has been harder or more painful in my life. Not even childbirth. But I triumphed. And I won!
Bio: After saving enough money to take a year off, Dianne Aarnink recently said adios to her life as a corporate CPA. She is chronicling her year of blissful unemployment over at www.skinnyseahorse.com, where you can also check out her small personal finance series – Skinny Wallet Phat Life.
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Holly@ClubThrifty says
Great job paying off your debt!
John S @ Frugal Rules says
Great work getting the debt paid off! We do a similar thing with our budget in terms of eating out and the like. Life is meant to be enjoyed and having the money allocated for things like that allows you to enjoy what you want without feeling bad for doing it.
makingsenseofcents says
Thanks for guest posting for me 🙂
My recent post Budgeting to Pay off Debt
Pauline @ Reach Financial Independence says
well done! I am not a fan of budgeting but I set goals, once the bills are paid, including debt and saving ones, the rest is fun money. If I want to get rid of the debt any extra money, windfall, found money, etc. goes to debt to accelerate the payment.
My recent post Bang for your buck, La France edition
Bill Myers says
This is a great piece on budgeting and the fight to concur debt!!! Credit Cards can charge high interest rates and that can come back and bite you in the butt!! I am glad that you were able to accommodate some of your habits, such as dining out!
My recent post Shopping Cards – A great budgeting tool
Jose says
The snowball works. I think the most important thing is to have the discipline to re-allocate the finds you were using to pay off one debt to the next one. I've seen this fail where those funds aren't 100% re-allocated and the length of time it takes to get rid of debt gets proportionately longer.
DC@Young Adult Money says
I'm an accountant (not a CPA as my degree is in finance) and I think it's safe to say that not all accountants/financial professionals are any more in-tune with personal finance than the next guy or gal. You can be really good at making journal entries, creating reports, and fixing variances, but that doesn't mean you know how to create wealth for yourself or cut out excess in your life. Your story is really encouraging for anyone who is suffering from debt overload!
My recent post Spring means Spring Cleaning
nicoleandmaggie says
w00t!
My recent post Does forcing kids to be bored teach them useful skills?: A deliberately controversial post
AverageJoe says
I love the fact that you were able to build good financial habits more than the outcome. A great outcome by accident happens once. When you build great skills great outcomes happen over and over.
My recent post Rethink Your To-Do List: Throw Out Your Problem Tasks
The Norwegian Girl says
i think it`s a smart move to make some budget categories that allows you some freedom and fun. After I`ve budgeted in rent, utilities, savings, transport food, medicine etc. I make sure to have some "fun money" which I can use whatever way I want. This makes things feel a bit easier when living on a budget.
Alexa says
Credit Cards got me good when I was younger. I was excited when I got my first that of course I had to get a second and a third! When I smartened up I used the debt snowball method as well. The momentum kept me going!
My recent post When Less Is More: Adopting a Minimalist View
The College Investor says
Congratulations Dianne!, The hardest part I think is being honest enough to acknowledge your problem in order to work out a solution and I find your strategy very interesting. Thanks for sharing!
My recent post The Fundamentals of Mining Stocks: Separating Winners and Losers
Canadianbudgetbinder says
Congratulations on debt freedome and you can tell how happy you were when you paid that last credit card payment. I would have been as well. Where there is a will there is a way, ain't that the truth! Cheers
My recent post How Smoking Affected The Cost Of Our Life Insurance Premium
doordebt says
Awesome work! That is great that you were able to pay off debt and now take some time off! I dream of the day I will be debt free and all the things I will do!
@TheHeavyPurse says
Congratulations on paying off your credit card debt – and more importantly changing your habits. I'm a financial advisor and while I believe I do a good job following what I preach – there are definitely advisors I know who give top-notch advice that they cannot follow themselves. 🙂 I guess it's like the mechanic whose car barely runs. You were very smart to find an approach that worked for you and allow yourself to still have fun while getting out of debt. Some people start so austere that they go on a spending frenzy when they can't handle it anymore. Congrats again!
Nick @ AYoungPro.com says
Great job! I love reading "get out of debt" stories. When I was making my own debt-free journey these were a great source of inspiration. Now they just make me so happy that other people have done/are doing it too.
John @ Fearless Men says
"The proverbial mechanic who drives a broken down car.
The contractor with an unfinished basement.
The hair stylist with roots."
Great lead-in! I started budgeting and then realized I still got more work to do in my budgeting.
My recent post 10 Ways to Cut Your Gym Membership Cost
Brian @ Luke1428 says
It's really difficult to change habits that are so ingrained. Way to go on seeing the light and working through your debt mess! It takes discipline and focus but your story is proof that it can be done.
@LifeDollarSense says
I agree that I love the lead-in! I am an accountant and am always amazed at my co-worker spending habits and priorities. I want to be a CPA who sets a good example. Student loan debt reduction is my main priority!
My recent post Living With Less-Weekend Clean Out
SavvyFinancialLatina says
Great job on paying off debt!!!
Maura says
Great post. This sounds a lot like the Dave Ramsey plan. I wonder though, how you got to make ends meet initially. You stated that all of your pay was going to credit cards payment, and that you were borrowing from one to pay the other. What did you do to make all your payments and still eat????
THanks!
@SumoCoupon says
Budgets are essential to paying off or down any debt! Everything should be recorded and you HAVE to stick to a budget in order to make a solid effort. Save money where you can on expenses and reduce your spending!
Michelle S. says
Thank you Mary! 🙂