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When I starting my first full time job back in 2014, I had a mess to clean up. I had roughly $20,000 in student loan debt and about another $7,000 in credit card debt. It did not take too long to figure out I had to come up with a strategy to clean everything up. Even though I didn’t have a formal budget, I already knew the credit card debt was a no-no and had to be erased as fast as possible. I quickly did that by living frugally during the first six months. On top of that, I put my entire performance bonus towards that debt.
Now all I had left was the $20,000 student loan which I hadn’t really started on since they were not due until 6 months after graduation. I had no idea how to tackle it. After doing some research, it seemed to me that there were two main schools of thought regarding how to pay off debt. One encouraged paying it off as fast as possible and the other was in favor of paying the minimum every month and investing the rest.
I picked the first one. This post is not about whether one method is better than the other, but how creating a budget helped my debt repayment strategy and made me realize how much I could do with my money. Let me tell you, it was way more than I thought!
When I started making payments, the monthly minimum was around $150. For the first few months, I was writing $400 checks to Sallie Mae and living care free. I thought I was making a killing. After all, that was more than twice the minimum!
But pretty soon, I started feeling like I wasn’t doing as much as I could. Not that I was spending ridiculous amounts of money, but something told me that some of my income was going to waste. That $400 monthly payment was totally arbitrary and I always ran out of money every month. Not taking a closer look at my spending would be an arrogant move. After all, it would imply that I could pull a number out of thin air for the amount allocated to my monthly payments and it would fit right in my budget.
So I sat one day and crafted a detailed budget, and of course I was dead wrong. After allocating a generous chunk to my grocery bill, lunch allowance and entertainment fund, despite splitting a premium cable bill with my roommates and having my own Netflix and Amazon Prime subscriptions, I still had $1100 dollars available.That’s all in addition to a 5% 401k contribution. Mind you, I live in Boston on a 55,000 salary.
So my first budget made me realize that I could live a lifestyle that was nowhere near frugal and still have more than a thousand dollars left to put towards financial goals.
At that point, it became very clear that not having a budget was costing me hundreds of dollars every month. Some people are more comfortable living without one and that works for them, but that was definitely no longer an option for me. I still to this day have no idea what caused all this waste, nor do I care. All I know is that after a few trial months, I now have a realistic idea of how much I have available to spend on necessities and luxuries and how much I have left for financial goals.
And guess what, it almost takes zero work! Only times I even look at my budget are when there are things to update like an increase in salary or a lifestyle change of some sort. I automate most of my bills and monitor categories that span throughout the entire month (i.e. dining out, groceries…) on a spreadsheet to make sure I don’t go over budget.
Once I have all the details figured out, I know the exact amount of cash I have left. Currently, it stands at $1400. On a typical month, it all goes towards financial goals although sometimes I do use some of it for small emergencies if I don’t wanna dig into my emergency fund. Heck, some months I spend it on gifts if I don’t wanna throw off my regular expense budget.
Regardless, I try my best to use as much of it as possible in net worth building activities as I like to call them. Even if some months I don’t do that as much as originally planned, at least I am totally aware of it and know exactly what it takes to get back on track the next month.
Here are some of the main takeaways to help you get your budget up and running:
- Automate bill payments
- Keep a close watch on “non-bill expenses” to stay on track
- Keep total amount in 1 and 2 below your income
- Put all the remaining income towards financial goals (savings, investing, debt…)
- Watch your net worth grow. Personal Capital is a free tool that monitors your net worth and your investments by securely linking all your accounts. With their awesome mobile app, it literally takes seconds to get a detailed snapshot of your finances.
Figuring out this simple strategy definitely helped me see the light at the end of the tunnel. I was able to pay off my student loans in a little more than two years, and I’m already working on the next steps of my financial independence journey.
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