Beginner budget tips for people with debt

John Cook
John Cook
May 6, 2019 · 6 min read

It’s really interesting to post content related to financial wealth, personal debt and money in general. I can never really tell which article is going to be a grand slam and which ends up being a turd sandwich. After posting 50+ articles it’s become apparent to me that one topic which resonates with many people is creating a personal budget. More specifically, how to create a personal budget when you’re in debt. I mean it’s super easy to create a budget if you have no freakin debt obligations right? Remember, a budget is you telling your money what to do instead of the other way around. If you’ve ever said to yourself “I make all of this money, where did it go!?”, then you my friend, need a budget. Let’s go over the 4 rules for creating a budget then we’ll dive into how to create a budget using a real-life example (mine).

4 rules of creating a budget

There are 4 rules we all need to follow in order to create a budget that is effective and realistic. These rules all work together in tandem, and if one is missing, the others are ineffective. Think of it like a 4 legged chair, eliminate one of the legs and the chair falls. The same concept applies for creating a budget.

Rule 1 — Know every expense

At the core of a budget is a personalized, itemized and DETAILED list of every known expense you’re going to pay in the upcoming month. Yes this includes the 99 cent itunes subscription. You need to be able to articulate every expense and its exact dollar amount. If you have a recurring subscription of $37.29 from Amazon for household supplies, then you need to include it in your budget. This was a challenging activity for my first budget but it also opened my eyes to the flagrant waste I was exhibiting with cash. I had 2 HBO subscriptions and no fewer than 4 digital subscriptions which I didn’t even use. Don’t rush this activity and also don’t rely on your bank’s app to tell you your recurring expenses. That’s insanity. The banks exist to make money from YOU, the consumer. Don’t rely on anyone other than yourself to determine your monthly expenses.

Rule 2 — Know the due date of each expense

In addition to knowing the exact amount of each expense, it’s super critical to know the exact due date. You run a crazy risk of overdraft fees and headaches. I used to do this and it was a ton of mental math to make sure that I always had enough money in the bank to cover my expenses. By knowing the exact due date of each expense, you’ll be able to create a detailed budget while maintaining the appropriate cashflow.

Rule 3–100% of your income should be allocated to an expense or debt

Some people call this zero-based budgeting, but the principal is straight forward: if you make $5,834.38 a month, you need to have $5,834.38 of expenses (or outgo) each month. If you have buffer after meeting your monthly expenses (which you should, otherwise you’re running a deficit and need a second job), then all extra income needs to be allocated to paying off your debt. Your income — expenses should always equal ZERO.

Rule 4 — Pay your bills with a debit card

Some people subscribe to the philosophy of paying your bills with a credit card then paying the credit card off each month. This is terrible advice and a first-class ticket to the middle class. This credit card dance adds an additional layer of complexity and does not yield any meaningful results. Study after study has proven that people who pay their bills with credit cards spend an average of 15% to 18% more than people who pay with cash. You’re not winning and your cashback sucks. Most cashback programs pay 1%. Let’s say you have $100,000 of expenses annually on your card. You get back a whopping $1,000 but you’ve overpaid $15,000 to $18,000 to use the card. I’ve actually canceled all of my credit cards, in aggregate over $100,000 of unsecured credit and you know what happened? Nothing. I sleep easier at night knowing that I’m not contributing to the cancer of the middle class aka consumer credit.

Let’s put these 4 rules to practice and create a budget for May 2019

This month I’ll take home around $17,000. I’ll be paid approximately $9,600 on the 1st of May and $7,600 on the 16th. This is important because I will need to allocate my expenses against the related pay period which will be used to pay the debt. Note that you’ll need to follow rule # 2 (know the due date of every expense) to make this work! In my excel sheet, I have 2 columns as outlined below, 1 column for each pay period. If you get paid 4 times a month, then you’d have 4 columns. If you’re paid once a month, then you’d have 1 column.

Column 1 - bills I'll pay with my 1st paycheck.
Column 2 - bills I'll pay with my 2nd paycheck.
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After defining the # of pay periods and the amount earned in each pay period, now comes the hard part: identifying the expenses and assigning each expense to an appropriate category. I have 6 categories as outlined below.

  1. Category 1 — Debt: All of the outstanding debt owed to lenders, banks, and other people I generally hate.
  2. Category 2 — Housing: Housing expenses including rent, utilities, internet.
  3. Category 3 — Insurance: All non-health-insurance related expenses e.g. renters insurance.
  4. Category 4 — Pets: All recurring monthly pet expenses for my two beautiful french bulldogs.
  5. Category 5 — Subscriptions: All digital subscriptions I rent e.g. itunes.
  6. Category 6 — Life: All expenses I classify as life’s necessities including food, fun money, haircuts, etc

Now the categories I have in my monthly budget may not be applicable to your monthly budget. You may think the amount I allocate in each category is too much and that I’m overspending. That’s totally OK! What’s important isn’t whether or not you agree with my budget allocation, what’s important is that you’re able to clearly identify each expense you need to pay and when you need to pay it. With the categories defined, let’s check out the end product below, my May 2019 budget.

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What are some takeaways from this budget?

  1. I have EVERY anticipated expense for the month of May 2019 documented, down to my digital subscriptions.
  2. I have due dates (in parenthesis) for every expense so I know which pay period it’s due to prevent overdrafts.
  3. I’m paying my debt (student loans) 3 times for a total of $8,488.09. I have to create multiple payments to ensure the following: I don’t overdraft, I pay the minimum required payment, and any additional payments I can control and apply directly to principal.
  4. My income minus expenses equals 0. After allocating my income to my required living expenses, the remaining balance is allocated to my student loan debt. This is the secret sauce and how you accelerate your debt payoff! After paying your required bills, all of your extra money should goto paying off your debt as quickly as possible.

What’s crazy to think about is that I’m living off of just 48% of my post-tax income. Check it out below. Once my student loans are paid off (by the end of this year) I will have almost $9,000 of fun money to invest and create wealth. Insane right?!

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That’s it folks. This is how you create a detailed budget. I was fortunate enough to have someone incredibly wealthy (networth > $100MM) show me what it means to create a budget and live on less than what you make. Follow this process, pay off your debts, and live the life you deserve.

This story is published in Educated & Broke — a publication dedicated to helping you fight student loan and consumer debt by providing real-life, practical advice.

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