Hellobee

Last week I wrote about our family’s 4-step plan to restore peace in our house. Today I am diving into Step 1 of our plan, which is to create a realistic budget and stick to it.

Like many people, I have mixed emotions about money. I didn’t grow up in a family with lots of extra money, although we always had enough to provide our basic needs and then some. My husband’s family had a little more money. In many ways we are a typical, millennial couple when it comes to money – we are college educated, we have decent paying jobs, our families are neither wealthy or poor, we have student loans, we have a mortgage (actually 2 as we rent out the home we first owned and were unable to sell when we moved out of state due to the economy), we pay a lot for childcare, we eat out too much, we like nice things but worry about overspending, we have family spread across the country so we spend a lot on travel expenses, we pay a lot in taxes, etc.

Basically, it comes down to this — we have a decent cash flow but stress about what could/ would happen if we lost our jobs as we also have debt. We also often feel trapped by our student loans, mortgages, and the standard of living to which we’ve become accustomed.

For the past few years, we have spent a lot of time thinking and talking about money. We’ve created complicated Excel spreadsheets to track our spending and financial goals. We’ve read “The Total Money Makeover” by Dave Ramsey (which I recommend even if we don’t follow all of his suggestions). We’ve tried out various budget and savings apps. We’ve tried to cut our expenses. We paid off our car loans early. We put more than 20% down on the home we bought last year. We paid off a few student loans (unfortunately I have more than a few despite working almost full-time during college and law school). We increased the amount we contribute to our 401Ks. We’ve definitely made steps to secure our financial future, but I feel like we reached a bit of a plateau this past year.

For a variety of reasons, our expenses went up (buying a new house and having a 2nd child being the biggest culprits) and our income and job security went down. For the first time in awhile, I began to stress about the dwindling balances in our bank accounts, which escalated to us spending more and more time worrying about our overall financial health. Thankfully we were mostly worried about hypotheticals (What if one of us lost our job? What if we have to relocate again? What if one of us wants to switch professions or go back to school? What if we have a 3rd child or something happens that requires one of us to stay home for an extended period? What if our old car finally stops working? What if one of us is an accident?)

These may be hypotheticals now, but they are unfortunately real possibilities and all that worrying was taking its toll on us. And frankly, I was tired of feeling like my student loans or the fact we own a bigger house was holding us back from living our best lives. So we made a decision to dive in head first and tackle our remaining financial goals.

Here is a rough outline of what that plan looks like right now – Dave Ramsey fans will notice this loosely tracks his 7 baby steps with a few significant deviations:

Goal No. 1 – Create a realistic budget for our monthly living expenses. The key word here being realistic. Our first goal is to identify how much we are spending and on what, so we can then identify how much we have leftover each month and then start using that leftover money to accomplish our financial goals. I researched quite a few budgeting methods and applications and ultimately decided to sign up with YNAB. I will go more into that decision below, but YNAB’s features and methodology most closely aligned with the way we wanted to think about our budget going forward. Right now our budget focus really is understanding what we are spending and how much we have “leftover” each month, but our plan is to start identifying areas where we are overspending and do better where we can.

Goal No. 2 – Set aside 2 months of living expenses. In coming up with this number, we didn’t just set aside what we spend on average each month right now. Notably, we did not set aside money for childcare as we both agreed that we’d be willing to be a stay at home parent if one of us lost our job. We also reduced our budgeted amounts for things like eating out, house cleaning, and clothing since we admittedly overspend in those categories right now. But we set aside enough to cover the mortgage and related expenses for our rental home without taking into account any rental income.

Goal No. 3 – Continue investing at least 10% of our income into retirement. We have been doing this for the past few years and will continue doing this even though we have student loans to pay off. Unfortunately, my aggregate student loan balance was very high after graduating from law school, but my interest rates on those loans are relatively low, so I am not willing to forego saving for retirement and taking advantage of any company matches and tax benefits of a 401K until my student loans are 100% paid off. Our eventual goal is to raise this to 15% of our income after our student loans are fully paid off.

Goal No. 4 – Give a set amount to charity each month. This has become increasingly important to me as I think about our family’s values and the role I want money to play (and not play) in our lives. It is important to me that my kids respect money, understand its importance, and develop healthy spending habits as they grow older. Just as important to me is that my kids understand the importance of being generous with our money. We haven’t quite figured out what amount to set aside for charitable giving right now, but our thought is to commit to a regular gift with an organization that is meaningful to us (something like child sponsorship) and also set aside each month an amount for our family to decide how and where to give together. This could be something like donating to our relatives’ or neighbors’ fundraising efforts, helping to fund a classroom project on Donor Choose, buying ingredients to make sandwiches to pass out to the homeless in a local park, or giving to the relief efforts in Haiti after Hurricane Matthew. I expect we will give more money around the winter holidays and also hope we can have an open dialogue on how to help people in our own community.

Goal No. 5 – Not incur any other debt. A few years ago we made a big push to pay off our car loans and credit cards. We haven’t carried any debt other than our mortgages and student loans since then and want to continue to do that going forward. I actually don’t even use my credit card, which has ironically lowered my credit score quite a bit but I’m OK with that. We do know at some point we will likely need to replace Mr. Pea’s car which he bought used before we started dating over 10 years ago and has required quite a few repairs the past few years. We also don’t have a car that fits 3 car seats if we decide to have a 3rd child. So we will  need to think about that and make sure we’re budgeting appropriately to buy a new car and avoid a car loan if at all possible (or at least qualify for one with a very low-interest rate and plan to pay it off early like we did with my current car). We may also make a strategic decision to shift our purchasing so we are using a credit card and earning points, then paying the balance off in full every month.

Goal No. 6- Start aggressively paying off our student loans. We are lucky that right now our only debts are our mortgages and student loans. After some internal debate, we’ve decided to use Dave Ramsey’s debt snowball method to tackle these loans. Starting at the end of this month, we are going to take whatever we have left in our budget at the end of the month and use that to pay down/ off our student loans starting with the loan with the lowest balance. I should note that in setting up our budget we did set up some buckets to save money for anticipated expenses like holiday travel and gifts, home repairs, property and nanny taxes, an emergency fund, etc., so we won’t be running our checking account balance down to zero every month, but we are going to be much more aggressive in putting our “leftover” dollars to work every month.

If you’re unfamiliar with Dave Ramsey’s debt snowball method, you may be wondering why we are paying off the loan with the lowest balance first instead of the loan with the highest interest rate or highest monthly payment amount. Here is Dave Ramsey’s simple explanation, which he goes into much more detail about in his book:

“You’ll use the debt snowball to knock out your debts one by one, from smallest to largest. Pay off the first one. Then add what you were paying on it to the next debt and start attacking it. When you start knocking off the easier debts, you’ll see results and stay motivated to dump your debt. As each debt is paid off, your cash flow will increase and the bigger debts will be gone sooner than you think.”

Although I tried to talk myself out of following his advice, it really does make the most sense for us. Let me use our 6 remaining student loans (with close but not entirely accurate numbers) as an example:

Loan #1 – $6,000 payoff balance, $53.00 monthly payment, 3.4% interest rate

Loan #2 – $8,400 payoff balance, $74.00 monthly payment, 7.25% interest rate

Loan #3 – $9,000 payoff balance, $72.00 monthly payment, 3.1% interest rate

Loan #4 – $9,000 payoff balance, $70.00 monthly payment, 3.0% interest rate

Loan #5 – $14,000 payoff balance, $175.00 monthly payment, 5.6% interest rate

Loan #6 – $35,000 payoff balance, $350.00 monthly payment, 3.4% interest rate

If we have $6,000 to pay off our loans for example, we could pay down $6,000 on Loan #2 which has the highest interest rate, we could pay down $6,000 on Loan #6 which has the highest balance, or we could pay off Loan #1 completely! If we pay off Loan #1 completely, we will add back $53.00 per month into our monthly budget, plus we will have accomplished a goal – one loan down! Of course, we will still have a long road ahead of us, but I know from experience that I am a lot more motivated by accomplishing small goals than feeling like I made a small dent in a big one.

When I first set out scribbling in my notepad and thinking about our financial goals aggressively again, I really wanted to be able to come up with a plan to pay all of our loans off by the end of 2017. I quickly became discouraged when I ran the numbers and realized how much we’d need to set aside each month to do that. I’ve since reworked our goal to (1) create a realistic budget, (2) stick to it, and (3) use all leftover dollars to pay off our student loans. I am still optimistic maybe we’ll meet our 2017 goal, but even if we don’t we’ll be a lot closer to financial freedom at that time than we are now.

Goal No. 7 – Make a plan to sell one or both of our houses within the next year. This could be a post in and of itself, but we realized the weight of having 2 mortgages (even with offsetting rental income and our relatively low mortgage payment given the historically low interest rates we got to take advantage of last year) is too much for us. I spend a lot of time every month coordinating home repairs and other issues at our rental house, plus right now we actually lose a little money every month after property management and HOA fees. Right now the Zestimate on our rental home is still a little less than what we owe on our mortgage (we unfortunately signed our contract to buy this house literally days before the entire economy crashed in 2008), but when our current lease is up next summer I think we’re ready to bite the bullet and list it for sale even if we lose money on it. Starting this month, we’ll be setting aside money in our budget to allocate to any repairs/ updates we need to do before listing it, realtor fees, and any shortfall if we are unable to sell it for what we owe on it at the time.

We are also considering selling our current house. We love our house. It is beautiful and in a great neighborhood that feeds into one of the best school districts in the state. But something about it doesn’t feel like us, plus we spend a lot of money and time taking care of our house and all our stuff (and paying property taxes ouch). We moved here from a much smaller, older rental home in a very walkable little city, and, while we love the extra space and the openness of our modern floorplan, we miss the simplicity of our old lifestyle. I’ve been reading a lot about minimalism and walkability and am starting to realize maybe I am not cut out for the typical suburban lifestyle (which is wonderful in many ways but doesn’t feel worth the trade-offs to me, at least not right now). I may completely change my mind on this point in the future, but right now it seems like the right decision for us is to sell our current house at some point in the next year or so. Selling our current house may also be the only realistic way for us to both pay off our student loans and sell our rental home by the end of 2017 (since we put over 20% down we will cash out a good amount even if we eat our realtor fees and realize no appreciation on the sale).

Goal No. 8 – Sit down together and figure everything else out. We have lots of other financial goals (saving for college, setting aside 6 months of living expenses, increasing our retirement savings to 15% of our income, increasing our charitable giving to 10% of our income, potentially shifting our work situations so one or both of us can work less than full time or even stay home, and eventually owning our primary residence outright, as well as a few I am keeping mum about right now). As I mentioned in my previous post, I can have an all or nothing personality. I am that person who wakes up to feed her baby in the middle of the night and can’t go back to sleep because my mind starts racing and worrying about anything and everything (but unfortunately I am usually too tired/ lazy to get up and just get stuff done instead of obsessing about potential, future problems). It was important for me to set this “future” goal both as a placeholder for some of the things that keep me up at night but also as an incentive. Because getting to the place where we are able to use our income to accomplish our forward looking goals (or probably more accurately getting to the point where money is not holding us back from pursuing our life goals) is exactly where we want to be.

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We chose YNAB mainly because it offers a free trial period, has mobile and desktop applications, imports your bank activity directly (but doesn’t auto-categorize it like Mint did when I tried using it a few years ago), and is designed to give every dollar a job. I like it so far but am still struggling to set aside time regularly to update/ reconcile our budget and make sure we’re doing what we need to meet our goals every month.  I keep wondering if I would be better off doing it myself with a spreadsheet or just pen and paper.

Do you use a budgeting software? I’d love to hear about what systems you use to manage your money!