This post may contain affiliate links for your convenience. We only include brands we use and trust.
How to Pay Off Debt and Start Saving
Not too long ago we were in your shoes. We stood looking down the barrel of about $50,000 worth of debt. The grand total consisted of a $20,000 Master’s Degree, a $10,000 bathroom remodel, and a portion of two car loans. At the time it felt like we would NEVER pay off the debt.
We had two really young kids who required diapers, daycare, and lots of other expenses. I didn’t think we had any room in our budget to make payments.
Below is our guide to pay off debt and start an emergency fund. I promise that if we can do it…you can do! We completely understand that it feels like an impossible task – but that is before you you have a plan.
There are so many methods out there to pay off debt, but they require following very strict rules – they are what we consider to be extreme. Extremes don’t work for us, so we came up with another plan. A plan that worked to pay off debt and start saving.
Step 1 -Track Your Spending
You can’t create a budget until you know what you spend money on
Like most people – we don’t usually use cash. In this case, using our credit cards (and sometimes debit cards) helped us to track our spending for a few months. It is easy to log into your accounts and see what you have been spending your money on. All online credit card and bank accounts have the option to view this. Just find and click on that option once you are logged in to your account with your financial instituation and BAM! Right before your eyes is a record of what you have spent in common spending categories.You just have to select the time period.
We recommend viewing the past 6 months of spending to get a really strong idea of your typical spending habits. We use Mint.com for all of our budget tracking. We are not affiliates of Mint.com – it just has really helped us and we want to let others know about it.
If you aren’t signed up with Mint or you don’t want to have your personal info entered online you can always check out our Lazy Girl’s Budgeting Tool.
The Lazy Girl's Budgeting Tool
Your super simple budgeting spreadsheet all set up for you!
SUPER BONUS - Debt Snowball Tracker included!
I know there are a lot of “cash only” supporters out there. We tried that, but we found that using cash only created a HUGE TIME SUCK to have to track all of our spending by hand. We just don’t have time for that – We use credit cards instead and Mint does the tracking for us. On a side note – click here to see how we saved over $3,000 using an amazing cash back credit card.
Step 2 – Create Your Budget Categories
Now that you have tracked your spending you can create your budget
This trick was HUGE for us. Almost every other financial blog I had read told us to create the budget first. When you use someone else’s budget recommendations and try to follow them and ya know what? It doesn’t work! When we tried this within a month or two we were off budget and felt like failures and gave up. This method is the only budget that has ever worked for us and that is because it is based on our real spending.
Remember, this site is devoted to simplicity and balance. We did not get too nitty gritty while coming up with our budget categories. Are you REALLY going to track 40 different spending categories? No, and neither are we. What you need is just a handful of general categories that will give you a basic overview of your spending each month. To give you an example, here are our budget categories. The fact that there are only 8 categories keeps this system simple and manageable.
Our budget categories set up in Mint.com
- Car/Life/Homeowners Insurance Payments
- Gas and Auto Maintenance
- Utilities (includes internet, cell phone, electricity, and water)
- Restaurants/Fast Food/Coffee Shops
- Mortgage (or could be rent)
- Everything Else – that’s right….EVERYTHING ELSE is a category!
This keeps the entire process doable for us. There is NO WAY that I am going to track and categorize every single expense that comes up into a ton of different micro-categories; that would just stress me out! Our goal is to avoid stress, so we created this category and it totally works. We have used this system for almost 5 years and we have seen that we spend roughly $1000 in this category every month, so that is the amount we set as our limit for that category.
|CLICK HERE to follow our Personal Finance board on Pinterest |
The only trick is that when you add up the total of all the budget categories it HAS to be less than your total monthly income.
In the beginning of this process we were making a lot less money and we had a lot more debt, so that meant that our “Everything Else” category had to be smaller. Just adjust it to fit your income.
Step 3 – Put Those Two Steps Together
Use your budget & track your spending
In order to do this all you need to do is log into your Mint.com account (or whatever online budget tool you choose) ONCE PER WEEK! Easy peasy!
#1 The first goal of logging in is to make sure that all of your transactions have been assigned to the correct category. Sometimes the system doesn’t know that an item purchased on Amazon, should go into the “Everything Else” category, so you will have to tell it to do that. You can save those settings though, and it will put all future transactions in the category you assign.
#2 The next goal is to track your spending within each category:
The budget format on Mint is a simple color coded bar graph that makes it incredibly easy to see how you are doing. Green means you still have room in the budget category, yellow means you are getting close to the set limit and red means you have gone over. You simply make mental notes when you log in and that gives you a ballpark idea of what you can or can’t spend money on in the upcoming week.
For example, let’s say you log in and you have a green bar in groceries – awesome…this means you can still buy food! You notice you still have $250 left in that category, and there are two weeks left in the month. That means that this week you can spend about $125 on groceries.
At the same time you notice that your bar for restaurants is yellow – and you only have $10 left in the budget. That means YOU CAN ONLY SPEND $10 at restaurants – period! Once that money is spent – no more restaurants for you until next month, when the budget starts over.
Seriously, the easiest – most stress free way to track your spending EVER! Just what you would expect from Simply-Well-Balanced.
Now – the part you have all been waiting for! How did these steps help us to pay off debt and start saving? Thanks for reading through the first part to get to the juicy “genius nugget” I am about to share with you.
Step 4 -Subtract and Pay (or save)
ie: Money you need to MOVE…don’t just let it sit there!
On the last day of the month or a few days after that we log into Mint.com again. This time you can see your entire income compared to your entire spending for the previous month. Because you have created a realistic budget and have been logging in and making sure to keep your spending in check your spending will be less than your income.
Here is your action step – SUBTRACTION! (I teach first grade math, so I happen to be really good at this part. Ha!) Here’s your equation:
Income – Spending = Money you need to MOVE!
Here is how you MOVE the money. If you have any debt you MOVE the money by making (extra) debt payments. I recommend the debt snowball strategy by Dave Ramsey.
You continue to repeat this process every month:
1) Use your budget
2) Track your spending
3) Subtract and MOVE your money
Using this method we were amazed at how fast we were paying off our debts! Our two smaller car loans were paid off in a few short months – even though the loans had years left on them.
After those were paid off we had even more money each month when we did step #3 Subtract and Move. ALL of that money was now going to the larger debts and they started shrinking fast! We were super motivated and we loved logging into Mint and keeping our spending within budget – because WHAT WE LOVED EVEN MORE WAS SEEING OUR DEBT SHRINK SO FAST!!!
Then the best part came – all of our debts were paid off and when the end of the month came and it was time for step #3 again – we were able to subtract and MOVE THE MONEY INTO OUR SAVINGS ACCOUNT! That’s right we were to the point where our MONEY WAS OURS! No more making payments to someone else. Within a few short months our emergency fund was full and we were on to our next financial goals.
If you have been unable to stick to EXTREME plans before I highly recommend that you give this method a try. It worked for us and it continues to allow us to build savings and enjoy life so much more knowing that we can actually afford the life that we are living.
We would love to hear from you. Are you trying to pay off debt? What is your biggest challenge?