Debt-Free Forever (6 page)
Authors: Gail Vaz-Oxlade
When you’re trimming expenses, the first thing to do is to significantly reduce or completely eliminate anything that isn’t an essential expense: everything that’s a “nice to have.” If after balancing your budget and taking care of all the “need to have” items you find you have some money left, you can always add a “nice to have” back into your budget.
Grab a pencil and start chopping. Cut out everything that isn’t an essential expense. Chop your communications costs: cable, landlines, cell phones, Internet. Eliminate money in the
Clothing category, the Entertainment category, the Vacation category. Salon trips and massages are gone. The gym is gone. Restaurants and takeout … gone!
If when you add up the numbers your budget still doesn’t balance, you’ll have to look at ways to trim some of those essential expenses, eliminating the “nice to have” and focusing only on the “need to have.” Turn down your thermostat and put on a sweater to save on heating costs. Get rid of the car you simply can’t afford and carpool instead. Find a cheaper place to live. Do whatever it takes to get the budget to balance.
It’s amazing just how little people can live on when they become conscious of what they are spending. My families routinely have to learn to live on less. I’ve cut their variable expenses by 50%, 65%, or 85% and they manage. In fact, I haven’t worked with a single family to date that hasn’t had money left in the Magic Jars at the end of my time with them. You can live on less if you’re determined to change your circumstances.
Of course, determination is a big thing. If you’re at all wishy-washy about what it’ll take to set your money and your life straight, if you just can’t work up the guts to do things differently, it won’t be the budget that failed.
Sometimes no matter how much you cut, there’s still not enough money to get to the end of the month. That means you don’t make enough and you’re going to have to find a way to make more money. (We’ll talk about that in Chapter 9.)
You can’t sacrifice savings in the name of balancing your budget or paying off your debt. Sorry, that’s cheating. You have to
set aside some money each month for your emergency fund and for long-term savings, so that you’re working with a balanced plan.
The rule of thumb for saving is to set aside 10% of your net income. Take your net monthly income and calculate 10%: if your net monthly income is $2,875, the amount you put into Savings will be $287.50 a month. Never mind that you can’t imagine where you’ll find $287.50 right now. That’s your goal and that’s where you’ll start.
If you have a whack of debt and not enough cash, getting to 10% may take some time. It doesn’t matter how little you start with, you must start to save: something must go into your long-term savings and something must go into your emergency savings every single month.
I know there are a lot of people who believe you should pay off
all
your debt before you start to save, but I don’t agree. If you have nothing set aside in an emergency fund, the first time you run into a problem, you’ll go back to using your credit, which will be emotionally defeating. And if you don’t start the habit of long-term savings TODAY, you won’t ever start. I’ll help you figure out some saving strategies that will work for you later in Chapter 7.
All over the world, people have rinsed out their jam jars and are now using them to manage their money. Perhaps it’s because putting money in the jars where you can see it coming to an end makes money management really concrete. When the jars are empty, you’re done spending.
The jars aren’t actually the “magic” in making money work; the budget is. The real magic is the fact that people seem to want to use the jars—people hate to budget!—and I think it’s because the jars make the process so tangible. You decide how much to put in the jars, you put the money in, you live on it, you can see when the dough’s running out so you have to stop spending. People seem to get a real kick out of having money left in the jars at the end of a week.
GAIL’S TIPSWhile many people have embraced the Magic Jars eagerly, some people seem to have difficulty figuring out where the money for the jars comes from. It’s as if they think this is “extra” money, not money they would have been spending all along. The Magic Jar money is money you’re already spending on things like groceries, clothing and gifts, gas, car repairs, and pet food. So finding the money to put into the jars isn’t a test. Of course if you’re in overdraft 27 days out of 30, you may think you don’t have the money for the jars. Hey, if you planned to eat this month, and you were going to stay in overdraft to do it, then that’s where you’ll get the money to start the jars. Once you’re on a budget and have a plan, you’ll work on eliminating your overdraft.
I divide my budgets into two parts: fixed expenses and variable expenses. Fixed expenses are the things that you must pay every month; the amounts tend not to change (much) and the money usually comes directly out of your bank account either through an auto payment or through some other form of bill payment (like online banking or writing a cheque). Categories like rent/mortgage payment, taxes, child care, utilities, auto loan payments, and the like fall under the title of fixed expenses.
Variable expenses are the things that are less rigid, that we pay for in cash, by debit or credit card, and that tend to get away from us if we’re not paying close attention: grocery shopping, gas, clothes, entertainment, the discount department store, gifts, travel, sports … you get my drift. These are the expenses I go after first when I’m cutting back to the bone on a budget. That’s not to say the fixed expenses may not need some trimming. But having trimmed, they usually stay pretty much the same from month to month.
The money that goes into the jars is the money that you will be spending on your variable expenses. So you can’t actually make the jars work for you if you don’t start by making a budget that balances.
GAIL’S TIPSPeople sometimes want to debate with me whether an expense category should be fixed or variable. I get
long letters from people telling me why a budget category on my interactive budget is in the wrong place. If you want to make the expense a “variable” expense, feel free. Want to add categories, subtract categories, move categories, you should. When I created my Budget Worksheet, these are the choices I made. But you should feel free to make your own. The only way you’ll be able to live with
your
budget is if you make it exactly what you need it to be. And remember, it’ll take some fine tuning to get your budget working just right, so don’t cast it in concrete. Let it change to meet your changing needs.
Want to use the Magic Jars? Get yourself five jars (boxes, envelopes, tin cans all work too) and label them:
•
Groceries & Personal Care
•
Transportation
•
Entertainment
•
Clothing & Gifts
•
Other
If you use the Interactive Budget Worksheet on my website, the amount that goes into the jars is automatically calculated for you. So you can do your own budget and then transfer the numbers to the online budget to see how much goes into the jars. Or you can figure out your own jar amounts.
Add up each of the budget categories that belong in a particular jar.
•
Groceries & personal Care :
If you eat in a restaurant or order takeout, this is the jar from which the money must come; ditto if you buy diapers.
•
Transportation
includes gas, repairs, tolls, taxis, and public transportation.
•
Entertainment
is everything from movies to sports, book buying to newspaper reading … whatever you consider fun; if you buy lottery tickets or gamble, you’re wasting your entertainment money!
•
Clothing & Gifts:
This category is self-explanatory
•
The Other
jar holds the money from your budget that’s variable but doesn’t fit in any of the first four jars. It may include your children’s allowance, pet costs, and medical expenses. If you have school trips, they’d go in the Other jar. Ditto anything else that’s unique to your specific situation that doesn’t seem to fit elsewhere.
Let’s take Clothing & Gifts as an example. If you have $50 a month allocated for clothing, and $25 a month allocated for gifts, your total in this category is $75. Now you have to divide this monthly amount by how often you’re going to fill your jars. If you fill your jars weekly, you’ll put $18.75 a week into the Clothing & Gifts jar. Fill it biweekly and you’ll be putting $37.50 into the jar every two weeks. It’s a good idea to keep a small stash of coins handy to make change for the jar
money. Don’t round up or down! That’s a sure way to throw your tracking off.
GAIL’S TIPSMy Interactive Budget Worksheet assumes there are 52 weeks in a year, so it multiplies the monthly amount by 12 and then divides by 52. This is perfect for people who are paid weekly or every two weeks. If you are paid twice a month, you may decide to fill your jars on the same schedule, in which case you would take your monthly amount and divide by two. If you like the idea of filling the jars monthly, the task of figuring out what goes in the jars is very easy.
You may have money left in the jars at the end of the month. Some of those jars are meant to accumulate. Let’s face it, if you have $25 a month for clothes, it may take a few months before you have enough to buy your kid’s new snowsuit. Ditto transportation, in which you accumulate your car repair money. Grocery money, too, should sit there for a while since there are big-cost items (think laundry and cleaning supplies) that have to be replaced on a less frequent basis. If you have money left over in the entertainment jar, either you’ve budgeted too much or you’re not having any fun. Fix that.
GAIL’S TIPSPeople often ask whether they can transfer money from one jar to another. I believe a budget is a fluid thing—that it must adapt and change as your needs change. I also believe that how you use your money must be guided by the plan you’ve made, but that you must be flexible enough to adapt on the fly when things change. If you want to take money from the gift jar and use it for food, that’s your business, as long as you realize that you now have no money for gifts. More money will not magically appear (until you refill your jar), and so you will have to be creative for Aunty Angie’s birthday. Keep in mind that if you keep emptying your clothing category so you can go to the movies, when the time rolls around to replace your jeans, you’ll have to hit a thrift store!