Budgeting Successfully – Part 2 – Starting the Month off Right

For demonstration purposes, let’s pretend that you now have a budget looking like the below budget.  These numbers were made up, but would represent someone in Baby Step #3 of Dave Ramesey’s program.  In other words, they have paid off all their debt besides their house, and are now building up an emergency fund.  If you aren’t familiar with the Baby Steps, you should get familiar.  The steps are outlined here:https://www.daveramsey.com/baby-steps/.

Example Budget:

Monthly Income
Paycheck 5000
Giving
Tithing 500
Charity 30
Savings
Emergency Fund 1601
401k 211
Housing
Mortgage 725
Water 53
Natural Gas/ Propane 40
Electricity 42
Mobile Phone 35
Cable 11
Internet 33
Transportation
Auto Gas 50
Car Replacement 100
Auto Insurance 45
Food
Groceries 400
Restaurants 20
Lifestyle
Shopping 60
Babysitting 20
Amusement 20
Kids Activities 100
Insurance & Tax
Health Insurance 80
Life insurance 20
Taxes 600
Legal / AD&D 20
HSA 150
Dental Insurance 25
Vision 9

In this example, this family grosses $60,000 annually, which comes out to $5,000 per month.  You will notice, that every dollar of the paycheck is allocated to something, even the government gets a category under taxes.  Also, if you entered this into every dollar, you would see the following breakdown:

    Giving: 11%
    Savings: 36%
    Housing: 19%
    Transportation: 4%
    Food: 8%
    Lifestyle: 4%
    Insurance & Tax: 18%

The largest portion of this persons paycheck is going toward savings, which is great for someone in baby step #2.  Also, you can see their take home pay is $5000 – $904 – $211 = $3885.  Their mortgage payment ($725) is much less than 25% of their take home pay ($971), which is also great.

Now that you have a budget in place, how do you execute it successfully?  Before the month begins, you should have a months worth of paychecks in your checking account.  Let’s take, for example, someone who gets paid on the 1st and the 15th.  If it is June 1st, then you should have two paychecks worth of money in your checking account: your check from May 15th (previous month) and your check from June 1st (today).  Another example is someone who gets paid every other week.  In this case, you would still save up two paychecks worth of pay.  However, since there are 12 months in a year (12*2=24 paychecks needed), and 52 weeks (52 / 2 = 26 paychecks), you will have two EXTRA paychecks during the year.  Those two extra paychecks can go straight toward paying off debt or building savings.  Hopefully that all makes sense.  Again, the important thing is that at the start of the month, you have exactly one months worth of pay in your checking account.  However you choose to do that is fine.

To start the month, you will want to pay the most important things first: Tithing, Debt or Savings, and Bills, in THAT order.  So, in the example above, on the first day of the month you would pay your $530 toward Giving, $1812 toward Savings, $939 toward Housing, $145 toward Transportation, and the $904 from your Insurance & Tax would have automatically been taking out of your paycheck.  That means, that at the start of the month, the only budgets with money left in them are Lifestyle, Food, and Auto Gas.  So, of the $3885 in take home pay, only $670 is left in the account on day #2 of the budget.  Wow is right!  A little scary perhaps, but if you have an emergency fund as you should, then this should not be scary at all.

Now, how do you spend the $670 that is left.  The most effective way to do this, is to divide each of the remaining budgets into weekly budgets.  $400 of the $670 that is remaining is Groceries.  So let’s focus on that one.  If you have $400 budgeted toward Groceries, and four Saturdays in a month, then split it in four, leaving $100 per week for Groceries.

Groceries are hard to keep in check, but my wife and I have found a system that works.  Every Saturday, sit down and plan the meals for the week.  We then write down the ingredients for those meals that we don’t already have in the pantry.  This list of ingredients becomes our grocery list for that day.  Next, we go to the grocery store, as a family, and purchase about 90% of our grocery budget for that week.  So, in this example, we would spend $90 on Saturday.  That gives us a $10 budget for other random Groceries that we forgot about during the week.  The reason we go as a family, is so that the kids can learn how much things cost.

But how do you stick to $90 per week in groceries in this example?  Isn’t it embarrassing to get to the checkout and have to take items out of your cart?  Yes, that can be very embarrassing!  To make sure we are right on track, I pull open the calculator on my phone as we go through the store.  As items get added to the cart, we roughly add up the cost.  This is helpful because it makes you second guess whether you really need that $10 box of Oreos at Costco.  When we get to the register, we already know how much the total will be.  No more guessing!  Guessing with money never ends up good.

I realize this was a long post.  But hopefully it gives you some idea on how to start the month off, on track, toward a successful budget

Budgeting Successfully – Part 1 – Leveraging Online Resources

So,

my sister started reading this blog, and mentioned that she would like to see more about how to budget.  She mentioned that Dave Ramsey talks a lot about budgeting, but she doesn’t feel like she has enough practical advice on how to budget successfully.  Honestly, this was a challenge for us for a long time.  For a lot of people, once they start budgeting, it seems restrictive and discouraging.  It can feel restrictive, because when you budget, you typically cut things out of the budget (such as dinging out) that were previously care-free.  It can feel discouraging if you don’t meet your budgeting goals month after month.  Through the next series of posts, I will be sharing what has worked for our family, and hopefully you can find something that works for you.

Oh, and before I forget, do not get into the mindset that budgeting is not for you.  I have met some people who seem to think that because both the husband and wife works, and they rake in a wad of cash, that budgeting does not apply to them.  Really, that is just an excuse.  Budgeting is just a way of staying organized and dictating where your money goes.  Most people who haven’t budgeted before are really surprised how much they actually spend on some categories.

The first step toward successful budgeting is creating your budget.  I am a computer-software-nerd-guy, so my first instinct is always to use online tools whenever possible.  I don’t really own paper, and kind of despise paper in general.  With that said here are a couple of great tools for budgeting:

  • Mint (by Intuit):
    • This tool is great because it connects securely to your bank accounts.  This means every transaction you make with a debit card will be electronically pulled from your account and auto-categorized for you.  However, the actual budgeting tool itself in Mint is not the best.
  • Everydollar (Ramsey Solutions):
    • This tool has an excellent user interface for budgeting.  However, you have to pay money if you want to import transactions automatically.
Given, the strengths and weaknesses of both tools, my wife and I prefer to use a combination of both tools.  You heard that right, “my wife AND I”.  Both of us, together.  If you are married, then you cannot budget successfully by yourself.  It has to be both of you sitting down, together, hashing it out.  We have found that we strike a great middle ground with no surprises when we work together on budgeting.
So, now to the actual budgeting.  Here are the steps that we follow:
  1. At the start of the month, gather the paystubs from the previous month.
  2. Create an account with everydollar if you do not already have one
  3. Enter all sources of income into the “Income” section of everydollar.  This should be your gross income.
  4. Enter in all taxes and other deductions from your paycheck.  Go as granular as you can (health insurance, dental, vision, fed+state taxes, legal plan, HSA, etc.).
  5. Enter all housing expenses in the same granular way (electricity, gas/propane, water, cable, internet, mortgage, etc.)
  6. Continue doing this, starting with the essentials of life (shelter, food, clothing), until you have filled out every category in your budget.  The key to doing this correctly, is that it should say “It’s an everydollar budget!” at the top of the screen.  This means that you have budgeted every dollar toward something.
  7. Tip: You may want to leave some extra money in miscellaneous for those unexpected expenses that occur mid-month.  But we’ll talk more about how to handle those situations a little later on.
  8. At this point, you should have a basic budget, that both you and your spouse have committed to.  Not just a “hey, this is what we will shoot for”… but actually committed.
  9. Now that you have done this, you should see a visual representation of where your money is going (see above).  It will also show you what percentage of your money is going toward each category (giving, savings, housing, etc.).  This in and of itself can be eye opening.  When we saw this for the first time, I immediately reduced the amount of my paycheck going toward the government in the form of taxes.
  10. Now that you have an everydollar budget created, you want to re-create it in Mint.  That way, you can use it as your day-to-day budget throughout the month.

Don’t worry, although the first month doing this can be time consuming, everydollar will automatically copy your budget over to the next month when you do this in the future.  My wife and I can budget now for the whole month in about 15 minutes.  In the next few posts, we’ll talk about how to actually stick to the budget you have created.

Hawaii Vacation Temptation – Timing Matters

Yesterday was Mother’s Day.  We were fortunate enough to have my parents staying at our house over the weekend.  For months, we have been asking if they would watch our kids for a week while we take a vacation to celebrate our 10-year wedding anniversary this January.  So yesterday we finally started looking at plane tickets, car rentals, etc.  The problem is, once you find a flight, you don’t want to lose it!

So what did we do?  We booked the vacation of course!  That’s right, just weeks away from finishing Baby Step #2 of being debt free besides the house, we booked a Hawaii vacation.  After my parents left to catch their plane back to Montana, we looked at each other and said, “We just broke all of Dave Ramsey’s rules.”  I told my wife that I couldn’t see any other way around it.  The date is getting closer and closer, and the seats on the plane are just going to be filling up, and ticket prices getting higher.  We decided we would think on it a bit during church that morning, and talk more after church.

Luckily, we had ordered from Orbitz, which has a 24-hour cancellation policy.  After clearing our heads a bit, we came home from church and cancelled everything we had booked.  Realistically, we will still have 6 months before the vacation once we finish Step #2 of our total money makeover around the end of July.

Looking back on this, the analogy that comes to mind is premarital relations.  I know that sounds a bit harsh, but there are a lot of similarities.  Having premarital relations in and of itself is not bad.  In fact it is a very good and positive thing… after you are married.  Some say, what is the big deal if you get the piece of paper before or after?  But in reality, timing and the ordering of these events does matter, since you are following the plan that God has designed.  Similarly, God does not want us to be in debt.  Being in debt is like being in financial bondage.  God does not want us to be in bondage to anyone.  It limits our ability to freely serve and build His kingdom.  So for this very same reason, the ordering of purchasing luxury items and paying off debt also matters.  I’m glad my wife and I were able to sit down and have a great discussion about what we should do in this situation… and that we ultimately made a great decision by cancelling the vacation reservations until we can pay for the vacation debt free!

Series of Setbacks

After we started our Total Money Makeover, we had a series of setbacks, that just seem to keep on coming.  Here are a few of the setbacks that come to mind:

  • 4/18/2015 – My car is totaled when a teenager is not paying attention and rear-ends my car.
  • 6/18/2015 – Our son, Dylan is born!  This is not so much a setback, but adds to the crazy.  😀
  • 11/27/2015 – Our daughter, Emma, has a severe croup attack.  We could have lost her this day.
  • 1/18/2016 – My wife, Kari, has her first symptoms of POTS.
  • 4/18/2016 – Our daughter, Alyssa, breaks her arm falling off the slide in the backyard.
  • 5/5/2016 – Our son, Christopher, goes to the emergency room after getting hit in the eye.
I call these setbacks, since many of them had a lot of emotional and financial implications.  When my car was totaled, I didn’t get much for it.  It was one of those cars that is not worth much, but seems to keep on going and never die.  The A/C never worked that well.  In fact I was planning on getting the A/C fixed (again) the very week it was totaled.  Fortunately, my brother was in the process of trying to sell his Honda CR-V.  It worked out where I could just buy the car off him for a great price.  And the A/C actually works!  Or it did, for the first few months.  I was tired of having a non-working A/C so, I we just had them put in a new compressor, and it has been working fine ever since.
By far the biggest setback in this list, is when Kari began having POTS symptoms.  If you know anyone who has had POTS, then you will know that it can be a life-altering, and debilitating disease.  The average time to diagnose POTS in a patient is 5 years and 11 months.  We got lucky.  In fact, after the first visit to the ER, my mother-in-law guessed that she may have POTS from some research she had done online and the symptoms Kari was reporting.  Can you believe that?  My mother-in-law, who barely knows how to use a computer, found this on her own.  But yet, many, many doctors kept causing her to think it was all in her head and she just needs some antidepressants.  I’ll be honest, throughout all of the Dr. appointments and visits to the ER, I started to lose a lot of faith in the medical system as a whole.  Most of the treatments that we found to help Kari deal with the symptoms were things that we found through our own research.  Part of me wants to go back and tell all of those doctors, “Hey look, she had this medical condition called POTS all along.  She wasn’t crazy or depressed.  She just had a medical condition that is commonly misdiagnosed!  Thanks for not caring.”  I know the doctors were doing their best.  I just feel like many of them are more concerned with ending the appointment and getting on to the next patient than actually trying to care for people and help them get better.  Needless to say, three months later, we are finally gaining some traction on treating Kari’s POTS.  In fact, we are now going to a Faint, Fall, and Frailty clinic at the University of Utah, which specializes in this sort of thing.  She is still only ~70% of her normal self, but that is much better than before.  We have found ways to cope with the disease, and are getting back to a normal rhythm.  She has been great throughout it all.  She really is an amazing woman.
Despite all of these setbacks, Our Total Money Makeover Adventure continues!  In fact, the Total Money Makeover has helped us make good financial decisions through all the turmoil with confidence.  Life is great.

Our Total Money Makeover Adventure Begins

March 1st, 2015

Little did we know, that March 1st 2015, would be the beginning of some drastic changes for our family.  This is the day that I ordered the book, the Total Money Makeover, from Amazon.  I had read other financial books, such as The Millionaire Next Door, Rich Dad Poor Dad, and others.  But I will be honest, none of them really prompted me to change much in the way we handle finances.  In fact, here is what I wrote to my family in an email after starting the book, “I am curious as to whether or not some of you have read Dave Ramsey’s, The Total Money Makeover (or any other of his books for that matter).  I’ll admit, I’ve read other financial books, but I feel like this was the first one that actually motivated me to change something.  Which, is and of itself surprising, since I kind of went into it thinking there is nothing this guy can tell me which I don’t already know.”

I was prompted to read the book after I had finished a book called “How Will You Measure Your Life?” by Clayton Christensen.  I was looking for another book to read, and this one seemed as good as any.  At first, I was very skeptical of what Dave was saying.  First of all, I did not trust that $1000 was enough for a starter emergency fund, when I have a family of 5 kids and a rental property.  So, not trusting this, we did a $5000 starter emergency fund instead.  Then, I also asked myself, how can we get by without a credit card?  We will miss out on the rewards!  No, not the precious rewards!  And what about booking hotel rooms!  How can we book a hotel room without a credit card!?  Despite all of my doubts, I kept reading through the book.

Over the next few months, I slowly became more convinced of what Dave was saying as I not only began to put in practice what he was teaching, but also started listening to the radio show.  We eventually dropped our emergency fund down to the recommended $1000 and even stopped using credit cards.  It turns out that we have saved much more than we ever got back in rewards by sticking to a budget each month.  As Dave often says, sticking to a budget was like giving ourselves a raise.

How We Did NOT Get Out of Debt

At this point in the narrative, I wish I could tell you that we got out of debt.  But we didn’t.  In November 2012, we had approximately $65,000 in savings.  We had saved this money over the past few years, largely in part due to the success of our mobile app development business.

Why didn’t we use this chunk of change to pay off the student loan when we had the money?!  One of the main reasons was that I had just turned 30 years old.  Mentally, I was thinking, if I want to retire at 60 years old and have my house paid off, then I need to start my 30-year mortgage at age 30.  Simple math right?  So, for better or for worse, we went from having $65k in the bank to $65k in debt… overnight!  The $65k in debt was $52k in student loan debt plus the $12k we had borrowed from our mother-in-law in order to put down a full 20% downpayment on the house.  Hey, at least we were smart enough to put 20% down to avoid the mortgage insurance penalty.  We also paid 10% interest to our mother-in-law for the time period she had loaned us the money.

We hated borrowing money from family, so we quickly paid down the money we had borrowed from our mother-in-law.  It took us about 1 year to pay off the $12.5k we had borrowed from her.  This prepared us well for what was to come next.

The Silver Lining

Given how much debt we racked up while at graduate school in Georgia, do we regret the decision?  This is something I have asked myself many times, especially given the fact that I am no longer working in Bioinformatics on a day-to-day basis.  But the truth of it is, we do not regret having gone to graduate school in Georgia for two main reasons.  One, if I would not have pursued my ambitions in Bioinformatics, I would always have had that “what if” feeling, and wondered what was down that road.  Second, while in Georgia, we came in contact with someone doing mobile app development, which dramatically changed the landscape over the next few years.  Granted, we could (probably should) have saved up more money before going to graduate school.  We had saved around 15-20k prior to graduate school.  We all make left turns in life and learn from them.

Around April 2010 was when we started our side business.  While at graduate school, I had a Russian friend named Ivan who, instead of studying for tests, etc., would sit in the lectures reading the iOS app development spec.  He tried to get me involved, but with a new family at home, and going to graduate school, I didn’t feel that I had the time.  However, as soon as I graduated, I had a little more time and started getting into app development myself.  The first app I developed was a little DNA alignment app.  Soon after that, my wife got involved also, and we developed Word Waffle, LDS Temples, Finger Dance, and a few smaller apps.

Ultimately, this little app development business earned well over six figures over the years.  One of the apps, Finger Dance, rose to be quite successful.  At its peak, it earned $8,000 in a single day, the day that the Kindle fire was released from Amazon.  On the Google Play Store, Finger Dance gained over 5 million downloads.  This was the sliver lining in having racked up so much debt at graduate school.  And besides that, both my wife and I always had an entrepreneurial spirit about us.  We both minored in Business.  Mobile app development also gave my wife something productive to work on while wrestling with the kids at home.

How We Got Into Debt

The day my wife and I got married, January 2007, we had zero consumer debt.  And in reality, we have never carried any consumer debt.  By consumer debt, I mean any debt besides the house (credit cards, car loans, etc.).  I think we both grew up in somewhat uncommon households, where our parents never carried much consumer debt themselves.

Although we did not have consumer debt, we did purchase a new townhome just before we got married.  I lived in the townhome for about a month by myself prior to our marriage.  Everyone applauded us for the purchase, saying it is so good that you can own something right out of the gate.  The truth was, we didn’t own anything.  We purchased the townhome using an 80/20 loan, where 80% of the mortgage is covered by one bank, and 20% covered by another bank.  Usually the 20% loan is at a much higher interest rate, 8.4% in our case!  Why did no one tell us that this was a bad idea!?
After about 1.5 years of living in the townhome, I decided that I needed more education to reach my career goals.  I had earned a Bachelor’s degree in Bioinformatics.  It seemed that everyone who was doing the type of Bioinformatics work that I wanted to do had at least a Masters degree.  So, I started applying for Bioinformatics programs.  I applied to several schools (Stanford, Georgia Tech, can’t remember where else).  I was accepted at Georgia Tech and started going to school there in August 2008.  Looking back, it is a bit sad that I was so willing to pay out of state tuition without second guessing the decision.
During our time at Georgia Tech is when we racked up the majority of our debt.  The total loan amount at the end of the 1.5 year program was $54,486.5.  Wow, is right!  How did we rack up that high of a student loan that fast you ask?  Shortly after starting school, we had second child.  With two young kids at home, and me at school full-time, we basically took out the maximum loan amount that they would allow so that we could make ends meet during that time.  So a lot of the loan amount covered housing, food, and books, in addition to the tuition.  Luckily, I was on a Research assistantship and/or Teaching assistantship most of the time we were there, which earned us reduced tuition.  Otherwise, it would have even been higher.
In a nutshell, that is how we got into debt.  The next few posts will show how we got out.