Do you need a game plan for your finances?

November 3, 2006 at 7:13 pm 3 comments

The answer is yes. It doesn’t really matter how much you make or don’t make, how much you owe or don’t owe, you should always have a plan. Heck, football teams have play books that coaches develop to give them the best chances to win. And that’s just football. Home builders have to have a blueprint before they can build a house, otherwise, they’d build a mess if anything.

So, what do you need to start winning financially? Here’s a few tips to get you started.

1. Budget.
Whatever you want to call it, whether it be cash flow plan or spending plan, a budget is simply your plan to tell your money what to do. If you don’t tell it what to do, it’ll leave and you’ll be left wondering where it went. Once you have your budget set, make sure you actually do it. Otherwise, it’s pointless.

This is the budget (pdf) we use that works great for us.
(Note: If you’re married, make sure you and your spouse do the budget together and agree on it. This is very important.)

2. Emergency Fund.
There’s some debate about whether you should do this before or after you pay off your debt, but in the end, we’ve found it works best for us to have part of the EF as a cushion to avoid more debt. Dave Ramsey recommends putting away $1,000 in a money market account (or similar account) before you work on the debt. That can vary based on your income level, so find the right amount for you. The recommended amount for a full EF is around 3 to 6 months of living expenses.

3. Debt Reduction/Elimination.
It’s important that you have a plan to reduce or, better yet, eliminate debt. We highly recommend using the debt snowball. There are variations of the snowball, so we’ll just explain the basic premise. List your debts from smallest to largest, either by balance or interest rate, starting with the smallest first. Make your minimum payments on all the debts, except the smallest. Throw all the money you can on that little one until it’s gone, and then roll over that payment to the next. Do this until your debts are paid off.

What should you include in the debt snowball? Everything but the house.
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If you’re one of the lucky Americans with no debt and a full EF, congratulations! You are in the top 3% of Americans, financially speaking. If you are, I’d love to get some feedback on how and what you did to get there.

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Entry filed under: Budgeting, Debt Reduction, Saving and Investing.

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3 Comments Add your own

  • 1. Dimes  |  November 3, 2006 at 10:23 pm

    We’ve got the full EF (six months’ BLE), a fairly good retirement nest egg, two PIF cars and $19K in student debt, which really isn’t so bad, given we’ve only been married two years. We’ve gotten where we are by a lot of number running and smart spending. More details can be found here. Great blog!

    Reply
  • 2. chaka42  |  November 3, 2006 at 10:37 pm

    Dimes, thanks for stopping by. Man, $19k in student loans…I’d pour money in that thing like crazy. You mentioned in your blog about it not costing you guys much, and that’s good. But I’m right there with your hubby, I’d feel much better without that $19k hanging over me.

    Hehe, I just redid our consumer equity sheet and am excited at the progress we’ve made thus far. Considering we only seriously got into debt elimination mode last June. We paid off over $15k between then and November of that year. It was awesome! We still have Sallie Mae hanging out with us, but she’ll have to find a new home in the next year or so. Can’t wait!

    Again, thanks for your comments.

    Reply
  • […] Myth 1: Getting out of debt is easy. The less reputable debt consolidation companies will promise you that they can fix your mess easily and quickly. And, some even claim to help you increase your credit score in the process. Truth: Getting out of debt is a tough road. Sure, it’s a bumpy ride, but it’s worth it. See number 3. in Do you need a game plan for your finances? […]

    Reply

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