Two Vital Financial Rules

There are two rules I live by for budgeting. The first is to have as much margin as I can between my income and expenses. The second is to earn interest not pay interest. We applied these two rules and were able to pay off $20,000 in debt (within 15 months) and live on one measly income while my husband built up his graphic design business. We have a mere $5,200 left on my student loans (earning less than 3.5% interest).

CREATE MARGIN

Add up all income. Add up all expenses. Do you spend more than you earn? Is the margin too slim to pay off your debt? If so…

Income – Maximize your income. Are their tax deductions you aren’t taking? Are you insured at more than you need to be?

Rent – Make sure you aren’t paying more than the national average. If renting, consider moving to a lower cost neighborhood. If you own your home, consider moving if you can make a profit on the sell of the property.

Energy – Conserve energy by turning off lights when you’re not in the room and switching out lightbulbs (when they need it) to lower energy users. Run the dishwasher only when full. Use the oven less. Unplug appliances when not in use. These are the most basic tips.

Water – Put in low flow showerheads and turn off the water as much as possible.

Phone – Do you need a home phone? Can you sign up for a Skype account and pay $30 for the year instead of $30 per month? If you hate your cell phone, like I do, can you switch to a pay as you go phone and cancel your phone service?  If you can’t, do you really need the full text plan, iPhone package AND 3,000 minutes? If so, you need a life outside of your phone!

Cable – Can you watch your favorite shows online for free? If so, cancel the cable.

Internet – Are you on the computer enough to justify the cost? Can you split the cost with a neighbor after setting up a wireless network you can all use? Can you reduce the package or look at competitors?

Food – Use a program like e-mealz.com to reduce food costs. Research menu plans online, shop seasonally. Sign up for a community garden. Have cheap dinner nights, and reduce the number of restaurant visits.

INVEST WISELY

Save save save.

Fund a savings account and retirement as much and as often as you can (even if the retirement is in low interest savings accounts). Fund your retirement before you fund college accounts for your children. They can get student loans if necessary and pay them off, just like you did.

Only take on good debt – There are two types of acceptable debt in my mind, mortgages and student loans.

The first should be undertaken only if you get a competitive interest rate, have enough for 1.5 times what you’re currently paying for rent, are staying in the same city for more than five years, and have enough in an account for a 20% down payment and closing costs. If you can’t afford those things, do not purchase a home. If the last two years have taught us anything, it should be that it’s not necessary to own a home. In fact, those that rented through this market crash are much better off financially than those that financed homes at 100% at the height of the housing fiasco.

The second can build up your credit rating while still in school, and funds an education that can dramatically increase your earning potential. If you are in graduate school, don’t max out the loans no matter how tempting. Pay for books and extras as much as possible. Get good grades and learn as much as you can. It will make all the difference after obtaining your first job.

Pay off and avoid all bad debt – Credit cards, car payments, time shares, etc.

Do not carry debt on a credit card. Do not purchase a new car. Do not put a vacation or clothing or anything else on a credit card if you cannot pay it off within the grace period. If you can do this one thing, you will live a rich and happy life. Cars lose most of their value just by driving off the lot. Clothing put on a credit card can take five years to pay off.

I learned these lessons the hard way. I charged up my first credit card when I was 18, thereby wrecking my credit. It took almost ten years to get out of the habits I had learned. I still find it hard, spending money gives me a high like no other followed by extreme guilt. I avoid high end stores, knowing I can’t truly afford what they sell. We review every category of our budget on a quarterly basis and routinely knock down costs as we get better and better at the budget game. Our cost of living has gone down dramatically in the few years we’ve been married, but we still fail in areas like the food budget (restaurants are just easier). Yet we haven’t taken on any debt as a married couple and we hope to be able to build from savings a small studio to live in for the next five years.