When
falling in love, the last thing that anyone really wants to think about are
finances. At least in my experience,
this is just not a topic that comes up while courting a mate. When Mere and I
started dating, there was nothing I thought about other than finding a way to
spend the most amount of time with her.
I soon realized that this was going to be the girl I would marry and
something started clicking in my head. The
end of my bachelor days were near and I would soon be responsible for someone
other than myself. It was a no brainer
that I needed to start getting serious and make sure that some smart decisions
were made and a plan put in place. I
will never claim to have been the best with my own accounting, and I am
definitely not a genius now. What I will
say is that with a bit of research, some planning, and a lot of trust and
communication with your partner, most anything is possible.
Before
the pen even hits the paper to start a budget, it’s time to get humble. Everyone knows the turn “keeping up with the Joneses,” yet most of us have been guilty of doing it at some point. This needs to be tossed out the window when
starting a budget. Thoughts like “how
does so and so go on that many vacations” and “how does this person go eat here
and there every night?” In the age of
Facebook and Twitter, we are bombarded constantly with what everyone else is
doing and “checking in” to. Since you
have no idea what anyone’s financial situation is like, you cannot make this a
benchmark on what you “should” be able to do with what you make. Until you have your own numbers in front of
you, there is no way to know what you are able to do. Here are a few reasons why.
Personal finance facts:
-Approximately 40% of families live on 110% of their income.
-50% of Americans have less than 1 month of savings.
-57% of American households do not have a budget
-Americans spend 12-18% more when using a credit/debit card.
-30% of American workers have less than $1,000 saved for retirement.
In our opinion, if you
are married, you count as one. There is
only one budget and one combined income. Meredith and I do realize that some married couples prefer to keep their finances separate and I'm sure that works wonderfully for a lot of people. While most everyone has their own financial situation, the suggestions I found have been working out well for us. Instead of finances being the base of arguments, it has brought us closer together and makes us feel like a team. Under most circumstances, these steps seem to be easily manageable as long as there is communication and acceptance of making some sacrifices together.
In our venture to make a budget, get rid of debt, build savings, and
plan for our retirement, there were 3 phases to tackle.
1. Assessment
The first step is probably the most important. This involves getting a true understanding of
you and your partner’s financial situation while sitting down together.
-How much is your total combined income?
-What is the total of all necessary bills (i.e. cable, cell phone, car
insurance, mortgage/rent, and all other scheduled monthly payments?)
-What is the total amount of debt (i.e. balance on a car note, student loans,
credit card balances, unpaid medical bills) and at what interest rate?
-What does a list of your true assets look like (i.e. investment accounts,
savings accounts, owned automobiles, or real estate?)
Right these numbers down, create a GoogleDoc,
make an Excel spreadsheet, or some other nerdy thing that I don’t even know
about. Just do it!
2. Combine/Sacrifice
When you get married, there are many chances to cut back on monthly
expenses. Combining car insurance, cell
phone plans, healthcare plans, and gym memberships are just some items off the
top of my head. Do not hesitate to
explore any avenue, since the options are abundant.
Then comes the hard part, but I promise it is worth it to
spend adequate time on this step. It’s
time to trim some fat from monthly expenses.
These could be habits from your single days when you were responsible
for yourself. Mere liked to go buy coffee every morning before work; I would eat lunch out of the office everyday
with coworkers. These things add up
quickly, and they became sacrifices that we could deal with easily. Mere started drinking coffee at work, and I
started taking my lunch. Problem
solved. It’s much easier to sit down and
hash these out now. If not, money
wasting habits could easily lead to arguments down the road.
Mere’s Grandparents gave us Dave Ramsey’s “The Money AnswerBook” when we got married. This really
was one of the building blocks for our budget.
On his website and in the first chapter of this book, Dave lists out his
Baby Steps for finding financial stability.
These Baby Steps are:
1. $1,000 in an Emergency Fund
2. Pay off all debt (except a mortgage if
applicable)
3. Establish 3-6 months in savings for emergencies
4. Invest 15 percent of your salary into pretax
retirement plans and ROTH IRA, if eligible
5. College Funding
6. Pay off home early
7. Build wealth!
Now, while we might not have followed this to an exact T, we
did take it pretty seriously. Like I
said, everyone’s situation is different.
We built the $1,000 emergency fund right away, while also contributing
fully to Mere’s company matched 401(K).
Who could turn down free money?
Once the Emergency Fund was established, we started paying down all of
our debt (credit card, some wedding debt, both of our cars, only holding back
on a student loan) using Dave Ramsey’s “Debt Snowball” method. While the most recommended way to pay down
multiple debts is start with the highest interest rate debt first, sometimes it
can create a mental barrier. By starting
with the smallest debt amount first, you can feel accomplishment and gain
mental momentum. Even though things were
going well, I still did not feel comfortable with our Emergency Fund. So, we set up an auto deposit with our
paychecks to add to savings at the same time.
Once we had 3 months of savings built up, and a good chunk of debt paid
off, I felt it important to start loading up our retirement accounts.
Each paycheck, we put
15% of our salary straight into Mere’s 401(K) to maximize the company matching,
and then the left over goes into a Scottrade Roth (IRA) that will be contributed to the maximum
each year. I chose to fill our Roth (IRA)
with a group of strong dividend paying companies. The reasoning is that Roth (IRA) accounts are
funded with taxed money therefore will not get taxed on the growth of the funds
when they are withdrawn during retirement. In a perfect world, we will be lucky enough to
continue this until retirement.
Once
this was established, the last item of debt was in our crosshairs. Mere had a student loan that was on course to
be paid off in 5 years. This was way too
long to be paying interest. I updated
our budget and found a plan of attack to get it knocked out in 5 months. My awesome and willing wife agreed on the
aggressive budget, and now we are currently half way through it. In just two and a half months we will not
have any debt other than our mortgage.
Since budgets are not static, I have already come up with a new budget
once the student loan is paid off. We
have chosen not to start college funding (Baby Step #5) for our children,
because there are no plans in starting a family for a few more years. If we have a little one, the goal is to open
some sort of 529 or ESA plan, but we can worry about that later. Instead, we will go straight onto Baby Step
#6 and start aggressively adding to our mortgage payment and savings. We did end up getting a 30 year loan for our
house for the flexibility, and the goal is to start paying it down like a 15
year.
With
interest rates so low these days, some people advise not to pay anything over
the monthly mortgage amount. While I
understand the advice, I just rather get as close to owning the house as
possible in the quickest amount of time.
Watching the housing bubble burst in the past left me with two mindsets,
but I will get into that in another post that will talk about our first home
purchase together.
The Wrap Up
This might be a lot to take in; especially for someone that
has never established a budget. To give
a CliffNote’s version, start with writing down your income and your monthly
bills. Then, get familiar with the phrase
“Pay Yourself First”. This means, if you
only fund savings and retirement accounts after bills and discretionary
spending, you will probably never get anywhere.
Without paying yourself first, it is also hard to know how to live
within your means. Once you have a clear
picture, jump right in to the Baby Steps.
Trying to pay cash for things should also be way up there in priorities. The importance of this has to deal with our
changing relationship with money. When
you are constantly paying with debit cards or credit cards, it is much easier
to forget its value. No matter if you
are buying a $1,500 couch, or a $3 cup of coffee, you are handing over the same
piece of plastic. When you purchase with
cash, you see exactly what you are giving up.
Although at times Mere and I wish we could do more, or not
catch flack from our friends for being on a budget, we are content. Debt is a weight that can be so heavy on the
shoulders. If it is not now, it will
catch up with you eventually. This post
was created for all the inquiries we received about getting on track financially. As mentioned, you need to take this all with
a grain of salt. These are the steps
that have worked very well for us, but might not be for everyone. Just remember to come to terms with your
financial situation, and work together to become responsible. Good luck!
