A Plan, a Failure, and a Lesson Learned – Part #2
And Mike’s story from yesterday continues…
A Plan, a Failure, and a Lesson Learned – Part #2
by Mike Rubenstein
Necessities, BOGO, and the Two-Faced Southwest Lady
Being a young professional with no financial obligations and plenty of disposable income leads to a certain kind of lifestyle; “Work hard, play hard” as most of like to call it as if to rationalize our weekend behavior and borderline jet-setting travel habits. When I made the purchase of my home, it took far too long for me to realize that this lifestyle had to change with the addition of such a large financial obligation and significant reduction in disposable income. I no longer had the means to spend the hundreds I was used to weekly at the bar or to take that monthly trip I had become accustomed to. By the time I realized that I was over my head, I was more than $7,000 in debt. It was time to examine my lifestyle and figure out how to reduce my expenditures.
The first thing I did was call my credit card company ask for the lowest possible interest rates. If you eliminate any kind of rewards program on your credit card then you can drastically lower your rate. In my case my rate was reduced by over 5%. Unless you are able to pay your credit card in full each month, it is clearly worth forgoing the rewards to pay less interest…especially when that interest starts compounding. The next thing I did was develop a comprehensive budget by going through my last 4 months of credit card expenses and create a line-by-line breakdown of each expense. I then categorized each line item as one of 7 categories: Food (work), Entertainment, Misc Expense, Consumer Staples, Food (entertainment), Groceries, and Travel. I examined each of these closely to determine where I could cut back.
The first thing I noticed I had to cut back was travel. Yes, Southwest may have no hidden fees, but don’t let the creepy two-faced lady get in your head. Traveling is full of overlooked expenses such as taxis, airport entertainment, and the “I’m on vacation” spending mentality just to name a few aside from the obvious airfare and lodging expenses. When you are in debt, you do not have the luxury of travel on a regular basis.
The next thing I knew I had to cut back on was the money I spent on entertainment. If you have never looked at the amount you spend at the bar, I highly urge you to do so if nightlife is a hobby of yours. For 2 straight months I spent over 22% of my disposable income at bars alone. Throw in a weekly round of golf and your “entertainment” category can easily put you in the red by itself. I was often spending around 50% of my disposable income on entertainment.
Food is another easily reduced expense. Rather than going out to eat everyday at lunch, I started packing. As Brett Krupp touched on in his guest blog a few weeks ago, packing lunch is a great way to save. Packing breakfast and lunch, skipping the morning Starbucks, and reverting to the crappy Aramark coffee provided at work allowed me to cut over $120 in a month…and after a few days the crappy coffee isn’t so bad. I also almost completely stopped eating out and began being frugal at the grocery. Buying generic brands, collecting coupons, and searching for the best deals on each product significantly lowers your grocery bills. Most supermarkets run regular buy-one, get-one free (BOGO) deals on everything from shampoo and laundry detergent to snacks and fresh meat.
Being in debt is a good time to go on a diet as well, since it is imperative that you cut out unnecessary food purchases. Sodas turn into tap water and instead of keeping a pantry full of snacks you keep one or two items at a time. Food is a staple as well as a luxury and it is crucial that you determine which food items are staples and which are luxuries. Luxury food items are no different than travel or spending on clothes, electronics or other lavish items you may enjoy but can no longer afford.
The way to budget when trying to climb out of debt is to determine the absolute minimum amount you can live on while not driving yourself crazy. After going through each of my budget categories, I came up with a budget that I could work with. Remember that when you get deep enough into debt, it usually takes months to years to get yourself back in the black. It is estimated that the average young adult that has credit debt owes $4,088 (http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php) and the average 25-29 year old with a bachelors degree makes $38,118 a year (http://www.census.gov/prod/2002pubs/p23-210.pdf). Now think about that for a minute. Let’s assume that you are this “average young American”. Completely ignoring taxes, social security, Medicaid, insurance premiums, and other paycheck reducing line items and giving a generous 20% allowance for debt repayment each month, it would take you more than 6 months to pay that debt off. My personal budget that I developed is shown below converted into a percentage of total income and the categorical breakdowns shown as a percentage of disposable income.
Income
Paycheck 1 50%
Paycheck 2 50%
Total Income 100%
Fixed Expenses
Mortgage 33%
HOA Fees 8%
Total Fixed Exp 41%
Utilities
Cable 1.33%
Electric 1.30%
Phone 1.73%
Gym 0.81%
Gas 0.52%
Total Utilities Exp 5.70%
Total Disposable Income 53%
Food (work) 3.50%
Entertainment 20.25%
Misc Expense 3.65%
Consumer Staples 3.00%
Food (entertainment) 3.25%
Groceries 5.75%
Travel 0.00%
Total 39%
Leftover for Debt Repayment
14%
Your budget is no longer a guideline; it’s a lifestyle. Once you commit yourself to becoming debt free and learn to within your budget, you will be able to exhale little by little each month as you see your debt erode and your future financial stability becomes closer and closer to reality.
Stay tuned as the story continues tomorrow…
