Envelopes and Snowballs

Along the road to becoming debt free, life happens. In the first couple weeks of our journey my car battery died and hubby had to take a trip to the ER. It became real clear to me how much we needed our Emergency Fund, and as I wrote last time, we have successfully completed our $1000 emergency fund. Some day will get back to that fund and start saving 3-6 months of expenses. That comes after baby step 2, the Debt Snowball.

I've mentioned in other posts about using envelopes. I thought I would take a minute to explain the envelope system in case anyone is curious. Since we have started budgeting and attempting to pay down debt we have stopped using our debit card except for a few things and started paying cash for most things we can pay cash for. The one thing we have continued to use the debit card for is gas. Although it would help to pay for it in cash, I refuse to unload the children out of car seats, carry them inside to pay for the gas, and then load them back up, then pump gas. So we still use the debit card.

When we create our budget each month we have a line item for everything we could spend money on, well maybe not everything. Things pop up that you think, hmmm what envelope would that come out of. So here are some examples of the line items we have: Food/House Hold Items, Dining Out/Entertainment, Misc, Gifts and Clothes. We also have a category for blow money. Blow money is for whatever you want. Hubby and I each have our own blow money. At the begining and middle of the month we withdraw the cash from the bank and put it in our envelopes. Then through out the month when we need any of the things in these line items, we get the cash from the envelope and pay cash. (and then you are supposed to track on the envelope where you spent the money and how much...we are still perfecting this step)

I know you are thinking, how does this really work with groceries. Well at the beginning of the month, I take all the cash that I have in the envelope with me to the grocery store. I make my list based on the ads that week and what we need. Then I buy the groceries. We have yet not had enough money to buy what we need. Now as the month goes on, we have to be really cautious and selective of what we buy, so we stay with in our budgeted money. I'm not going to lie, I have used money from other envelopes to buy food if we got to the point that we were out of grocery money. Which does happen, because diapers suck up way too much of my grocery/household cash.

You are probably thinking this sounds like a pain in the butt. But I tell you it has really helped keep us in check. We use the debit card much much less. And the cash we have is the cash we have. We may move money from one envelope to another, but we never withdrawal more. We stick to what we budgeted.

I feel like an addict though. I miss my credit cards! I do. It feels like every day I have to recommit to not using them. Something will pop up that wasn't in our budget and I will think, I could just put that on the credit card we almost have paid off. Isn't that crazy??? We are paying down debt, and I'm still thinking how I can get what I want without having to pay for it today. So when I see that great groupon for a massage I have to talk  myself down and say, no, when we are debt free, or when I save up my blow money, then I can buy that. I'm still not used to making sacrifices in other areas to get what I want. But I am working on it.

Baby step two is the Debt Snowball. This is the babystep we are working on. I think B must know we are on this baby step. He seems to have stalled in his learning to walk. And we will be on babystep 2 for quite some time.

What is the debt snowball? Well it is the method you use to pay down/off your debt. You begin by listing out your debt, minus your mortgage. Arrange the debt in the least owed to the most owed. Then you begin making minimum paymetns on the items you owe the most. Then you take all the money you would have normally paid to these items and add it to what you would normally pay on the least owed item, and make one big payment until you pay it off. For example, say you have budgeted $500 to pay on debt this month. And you have 5 items to pay on. Lets say you have 2 school loans, each you pay $75, and you have 3 credit cards, 1 you can pay a minimum of $25, and one you pay a minimum of $50. This would leave you $275 to pay on your least owed debt/credit card. Once you pay off that credit card or debt, you add the amount you were paying on the one you paid off to the amount you budgeted for your next least owed debt. Therefore each time you pay something off it gives you more money to pay on the next item....creating a snow ball effect.

We are kicking butt on this debt snowball. We paid off our lowest debt (ok, it was just $100, but that's $100 that we can now put toward something else) and in September we will have our next debt/credit card paid off too!!!!!!!! It feels awesome! It is the fact that we are making this progress that helps me recommit every day to not use that credit card when AMAZING deals that I just can't live without pop up.

Back to my original statement at the begining, life happens on your road to becoming debt free. Have we strayed from time to time from our budget. Yes. Did we get back on horse...probably side saddled, but we are on. This road is the one that is less traveled these days. But some day we are going to look back and think it was an amazing ride!

Baby Step 1- CHECK!

The other night I had the realization that we had made it one month without using a credit card, and without running out of money. The past month I've never had to worry when I use my debit card if there will be enough money in the checking account. So, what changed? We made a plan for our money, we told our money how to work for us, instead of watching money fly out of the account and not really knowing where it was going. Holy crap was that freeing. You would think living by a budget would be restricting and frustrating. But in reality it was freeing. I was able to stop worrying. Stop worrying that the debit card would be declined when I bought food or gas. Stop worrying about having money for things we needed and wanted. I knew we had the money and it had a place to go.

Right about now you are thinking, what does this have to do with baby step 1? Or at least I would be if I had read the title then got to this point in a story. The other thing we have accomplished is saving $1000. This is money just for emergencies. In less then 2 months, we have saved over $1000. Not only have we been saving for our emergency fund but we've been saving to pay our personal property tax on the cars that will be due in November. In previous months we would have borrowed about that much from savings (which was until we started this, empty). When we began I thought, no way, no way in the world are we going to save $1000 very quickly. We just can't do it. But we did. Baby step1- save $1000. CHECK!

Now we are on to baby step 2 - the debt snowball. (As in there's a snowball's chance in hell that we are going to get the debt paid off anytime soon.) I didn't realize until recently why the Emergency Fund was so important. The Emergency Fund is there so you don't use credit while working on your debt snowball. I know I have said this before, but they suggest cutting up your credit cards and closing accounts as you get them paid. I am sooooooo not there. I have a long intimate relationship with these cards, they have seen me through some tough times. They have been there for me when no one else was. They even helped me make friends in Chicago, when I seriously was all alone. So cut them up, I don't think so. I will get there. I will feel more comfortable with giving them up as I see the money owed to them disappear and as I feel more able to buy the things we need without using credit. But for today, even with the $1000 emergency fund, I will keep my cards intact.

OK, so I drank the Kool-Aid. I believed going into this Financial Peace University that it would work if we did it. If my friends and co-workers could do this, surely we could as well. Is it hard? No its not just hard, it's one of the hardest things I've done in my life as well as one of the easiest. I know that probably doesn't make sense to you, but it is what it is. In the beginning I related FPU to trying to lose weight, you really do use some of the same principals. You start to question how much you want some things versus other things. The other night I learned that is called opportunity cost. Who knew it had a name. I thought it was just me over thinking things, but no it really has a name. Let me explain a little better: Opportunity Cost is what you give up when you buy something else. So when trying to pay debt or save money you start annalyzing everything. If I go out to eat I will spend $20, but if I don't, what could I do with that $20? Pay off debt? Save it? Invest it? When trying to lose weight it is the conversation you have with yourself, if I eat that now, I won't lose weight. I'd rather lose weight then to eat that (and so on). It begins to get harder and harder to spend the cash in your pocket when you put that much thought into it. Before FPU I might put that much into rationalizing why I needed something, rather talking myself out of something.

The biggest similarity between becoming debt free and weightloss, is discipline. It takes a lot of discipline to stay on track. But if you have discipline you will succeed. During the first two weeks of this month, we lacked discipline. Our envelope system is seriouly screwed up and we have probably spent more then we intended. We did this by using the debit card for things we had started paying cash for. A week into the month I tried to reconcile the envelopes, but in the end I don't know that I did. We just started another two week period of this budget. We might be able to get things figured out, if we are lucky. It was encouraging when I told hubby that I'm a bit nervous about how we are spending versus what we budgeted, he said, but the good news is we know how to fix it. He's so right. Every day we have the opportunity to fix it. You just make a new plan. Just like when you are changing other habits, if you fall off the wagon, you just get back on. I can't wait for this all to become second nature (someone please tell me it will be second nature, someday).

Baby step one complete...6 more to go. I think we will be on step 2 for a while. So come along for the snowball fight, I mean ride.