Creating and Sticking to a Budget: What we are doing with our new found “freedom” from debt

by Melody on February 14, 2012

As most of you know, our family has been following Dave Ramsey’s Total Money Makeover since 2007.  He recommends the following “Baby Steps”:

  • Step 1: Save $1000 for your Emergency Fund
  • Step 2: Pay off your debts using the Debt Snowball (lowest $$ amount debt first)
  • Step 3: Put 3-6 months expenses in savings
  • Step 4: Invest 15% of income in Roth IRAs and pre-tax retirement
  • Step 5: College funding for children
  • Step 6: Pay off home early
  • Step 7: Build wealth and give

The last post in this series explored how we started our journey and how we eventually got to our current debt-free state.  Now what?  Funneling money into bills you already have is a no-brainer.  This post will be all about where we have decided to go next in our budgeting crusade.

We wrote the last check to pay off our last bill around the middle of December.  We honestly thought it would be this amazing moment that kicked off the next budgeting chapter of our lives.  Instead, we floundered.  We were indecisive.  We had a lot of non-action.  Granted, it was the holidays and there were a lot of other things going on, but we pretty much just avoided the subject.

Thank goodness for our financial advisor.  She called to talk to me over the holidays and see how we were doing.  That was all the kickstart I needed, we scheduled an appointment with her in January to sit down and hash out our options.  She talked to us about our retirement, additional life insurance, what we wanted to save up for next.  Even for my husband and I, who have been budgeting for several years now, having a 3rd party to discuss things with in a non-emotional state, made a world of difference.

Our Tentative 2-Year Plan

1. Mortgage Installment Loan – This is a small loan in addition to our regular mortgage, which honestly should have been included in our Debt Snowball.  (More on mistakes we’ve made in another post)  We are paying an outrageously high interest rate and the loan size is totally manageable, so this goes first.

2. Increase Retirement Contributions – My husband’s company will match up to a certain amount of his retirement contributions.  To max this out, we would have to put in a huge amount of money that isn’t really feasible for us right now, so we are going to increase our contributions to 1% after paying off our installment loan.

3. Pay Cash for a New Truck – My husband’s truck has been a work horse, but is starting to show signs of age.  We just put a decent amount of money in to get a few things fixed and get it tuned up, but it will need to be replaced over the next few years.  This may not make sense for some to wait on something else to save up for a truck, but it’s a good logical next step for us.

4. Add Additional Life Insurance – This one is hard for us to wait on, but we went back and forth and back and forth on what to do first.  There are so many choices at this stage about how best to dole out our money, what should we wait on, what do we need to do now to secure the future?  We have some life insurance right now, but are planning on adding to our current policies.  We both know that it gets more expensive the older we get, so we are hammering out our plan as quickly as possible.

5. Put 3-6 Months Expenses into Savings – While I know this is going to feel hard, as there are definitely other things we could use this money for, it will also come with peace of mind which is pretty priceless.  Our next big step is going to be selling our current home and buying a new one, so knowing this extra savings is there will help.

6. Increase Retirement Contributions – At this point, we should have our money working for us pretty well, so we will increase our retirement contribution another 1-2%.

As I mentioned before, our next step is going to be saving for a new house.  While we are doing this, we hope to put some money into our current home for some cosmetic upgrades to get it ready to sell.  While we would love to move right now, it just makes the most financial sense for us to stay in a home that works and is totally functional while we put our money to work in other places.

Just having a plan written down and agreed upon by both my husband and I is an amazing feeling.  We have been talking over the last few years about what we’d like to do first after we paid off our debt, but as I can’t remember anything, we’d have to have the same conversation every few months.  Then I would forget again.  Then someone would be itching for a new truck sooner rather than later.  Then we’d have to have the conversation again.  This led to more than a few disagreements, as our plans seemed to change with our emotional state.  Having everything planned out on paper means no more fruitless discussion.

Please ask questions.  This is a HUGE topic.  I can only touch on so much in one post without getting overwhelming, especially since everyone’s situation is so different.

I would love to hear where you are at in your budgeting journey.  Did you (or do you) have your plans in place for after you pay off your debts?  It’s interesting to me that this was such a big hurdle for us, you’d think paying off our mountain of debt would have been the hardest step.

The next post in this series will be all about how we manage our savings. 

In case you missed it:

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{ 8 comments… read them below or add one }

Kim February 14, 2012 at 5:54 pm

We have about 3 years to go before our huge credit debt is paid off. At that point, we’ll funnel money toward mortgage, and a vacation fund. That will be HUGE— we have been married 17 years and have 2 kids and have NEVER had a vacation that wasn’t simply a trip to visit family. It will be WONDERFUL to be able to do a trip AND not stress about credt card bills when we get home.

Living with so much $ locked into debt reduction is difficult, but I LOVE seeing the total debt go down each month instead of just paying interest fees.

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Catherine February 14, 2012 at 9:18 pm

Thanks for sharing! I did FPU at my church when I was 18 and it has profoundly changed the way I handle money. I feel so blessed to have gotten this education early! We have checked off the first three baby steps and are also floundering. It feels counter intuitive to put so much money towards retirement right now (since we’re only 26 and 27) before saving for our children’s college (they are 7, 2, and 1). I would love to meet with a financial advisor – how did you go about finding one? Do they charge per hour or something? We are at a crossroads with our underwater mortgage and many house repairs that need to be done. Thanks for doing this series – it is so inspirational to hear about others being debt free or at least trying it. When you’re doing it – it feels like everyone else gets to spend at their leisure, while I’m stuck saving pennies!

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Melody February 15, 2012 at 6:09 am

We bought the Dave Ramsey kit for kids, just to see what it’s all about. I think it’s brilliant to take it at 18, I’m going to put that on our to-do list (way in the future) to possibly enroll our kids before going off to college. Brilliant!

As for our financial planner, we ended up meeting her at a local home show and really connected with her. She has turned out to be wonderful. I was skeptical, since most of the time we don’t have two sticks to rub together, let alone extra money to give to a financial planner. Ours doesn’t charge per hour (not sure about others), she makes her money as a commission based on what we do through her (retirement, life insurance, etc). We actually have a VERY small retirement through her right now, but she told us she just hopes to grow with young couples and help us on our journey. As we’re convinced she has our best interest at heart, we will most likely go to her with bigger stuff in the future. She has been great about helping us along the way with decisions that don’t even make her any money at all.

If you live in Tri-Cities, I would be happy to pass on a recommendation. Otherwise, I would definitely ask around for personal recommendations. You really want to find someone who is going to look out for your best inerests.

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Catherine February 15, 2012 at 8:02 am

Thank you! I don’t live in the Tri-Cities, I live near Olympia. I will ask around my MOPS group to get some recommendations. Thanks again!

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Laura February 15, 2012 at 4:31 am

Thank you for sharing. I am curious as to how you found your financial planner. My husband and I are about to pay off all debt and want to make sure we are heading down a good path for our future financial decisions. I would love to have outside advice but don’t know where to begin to find someone that we would trust. Congratulations and best of luck going forward.

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Melody February 15, 2012 at 6:09 am

See response above. :)

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Lora February 15, 2012 at 8:31 am

Oh how I wish I could have started investing for retirement when I was 26 or 27! The thousands and thousands of dollars I could have made in returns! My kids WILL start investing when they turn 20.

We will be done paying off our debt in about 8 months or so. We are getting a house in the process (long story) so that will eat up some of our extra cash for sure. Also, we just had to purchase a vehicle for me (paid with cash) so that set us back a little. But our next step is to pour every penny possible into our savings until we have 3-6 months of living expenses in the bank (I want 6 months). Then we will get to start investing for retirement. YEA! That will be such a HUGE relief. Love your list Melody! Would love the name of your financial planner! Thanks!!

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Trina February 15, 2012 at 10:50 pm

We view our Roth IRA as an additional savings account. The amount we have contributed can be withdrawn without taxes at any time (since the Roth is after-tax money). Any additional funds earned while in the Roth would need to stay there (or face tax penalties).

It gives me additional peace-of-mind to know that it serves multiple purposes. If everything goes “well” it can be used for retirement, but if we need it sooner for something important, it’s there. It is somewhat “out-of-sight, out-of-mind” so it’s not tempting to pull from unless it’s really needed. At the moment, a good portion of our Roth IRAs are also functioning as house-downpayment savings since we’re not location-stable and are renting for now.

Just want to throw that out there for those of you who are trying to juggle multiple goals at once!

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