Tuesday, August 26, 2008

Back to Basics Post 5 Before the Snowball Rolls

If you are just finding the Back to Basics series you can find all of the posts in the series by clicking on “Back to Basics” in the sidebar. So far we have discussed tracking our money, finding money in our budgets and saving for an emergency fund.

Today’s topic is what to do before you begin the debt snowball. Now that you have $1000 in an emergency fund you are ready to begin paying off your debt. But, how good is your budget?

If you are like me, I was changing my budget daily when I first started…. “oh yeah, we have $20 in prescriptions each month”, or “Oh, I forgot that we buy dog food every other month.” So, you probably know that there are some things you have forgotten about. Another thing that was lacking in my budget was a plan for yearly expenses. For us, those expenses are car license plates and our real estate taxes. The grand total for all of this is around $2400 annually. So for us this means we need to save $200 per month to be able to afford these expenses when the time comes without wrecking our budget. I also decided that for things like hair cuts, oil changes, stamps, clothing, etc. I would budget another $65 a month. If we don’t use this money one month we will save it to use the next month. If it runs out then we just have to wait until we have enough to cover the expense.

Now, it is one thing to save all this money up, but how do you keep track? If you don’t keep track you will inevitably spend money that is meant for a specific purpose. Well, I created a Money file in MS Money that handles this for me. I got the idea from Trent at the Simple Dollar. He set up an ING account and created “sub-accounts” for this type of saving. You don’t have to use ING to do this. All you really need is a plain old savings account and a spreadsheet. First, decide what you want to sub-account for. In my case I have one called “irregular expenses”, another called “lump sum” (our $2400 above) , “hospital savings” (money left over from our hospital bills from the baby), “lease money” (we are holding on to a large sum of money owed for paying out our car lease and can’t get anyone to tell us who to pay!!) and “holding for bill pay”.

Each month we get three separate pay checks between my husband and me. I use the “holding for bill pay” to save extra money. This way I know it will not accidentally get spend, AND I have a specific place to put it and track it. So those are my sub-accounts. You will choose your own. If you don’t have any lump sum payments each year great, more cash to go toward your debt. But, I am sure we can all use some money for “irregular expenses”.

A side note. At this time do NOT save for things like vacations or a new TV (unless your old one is really about to die) we are only saving for necessities. All of our extra money we want going toward paying down debt. Got it?

Next week we will finally discuss the debt snowball!!

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