The Importance of a Budget

     There was a time early in my career when I didn't need a budget. I was 22, fresh out of the military and had landed a great IT job. I lived in a single bedroom apartment around 5 minutes from work and had no debt. Every month I could quite literally do whatever I wanted to and still put money away in a savings account on top of my 401K. Fast forward a few years and I own a house, I've taken out a personal loan, my fiancé has student loans, and I have a car loan. My monthly payments caught up to me so quickly that I accumulated over $10,000 in credit card debt before I realized that it was happening. I'd fallen into the hole that so many people do, selling my future to finance my present. I needed a plan to turn the tide of my finances.

Big Picture

     I went about constructing a complete account of my finances, a big picture view of where money was coming in and where it was going out. My financial boat was taking on water and fast. I starting crafting a spreadsheet to break out all of my in and out flows. Rather than micro-manage every transaction that occurred I started with the "usual suspects", the bills that came in every month and changed very little.

     It opened my eyes. Over 75% of my take home pay was being used to pay monthly bills. This included things like utility bills, my car loan, the student loans, and the mortgage. I was investing less than 4% of my take home pay. That left 21% for living costs, food, unexpected expenses, discretionary budget, and any additional savings that I would make (typically $0). In contrast my monthly bills during my early career used less than 33% of my take home pay, I invested around 17%, and the remaining 50% of my take home pay was free to use as I wanted.

The Big 3

     Where did all of this cost come from? Having the numbers in my hand I started to dig. Surprisingly a large amount of the difference between then and now came from just 3 changes in my life:

#1. I purchased a new vehicle. During my early career I had a cheaper used vehicle that I had paid cash for. As my career flourished I bought my first new vehicle and eventually upgraded that (prior to it being paid off) to an even nicer new vehicle. Looking back at it now  it was the wrong decision to make fiscally but I didn't really have much of a care and everything seemed to be going great.

#2. I took out a personal loan. Not for anything frivolous actually, but something that had needed to be replaced in my house. I should have had a more healthy emergency fund to be able to take on a task of that size. I was under prepared so my options became "put it on credit" or "take out a loan". I chose the latter.

#3. Student Loans came due. In what I can only call a financial epidemic in this country I too became sunk beneath over $35,000 in student debt. Not quite as bad as the new vehicle I purchased but almost.

     These three changes in my life now consume over 20% of my take home pay. Yet I wasn't quite aware of it until the balance on the credit card hit $10,000. I had never carried a balance before and in 2 years I went from paid off every month to paying the card company and extra $170 a month in interest.

The Other Things

     Of course those 3 aren't the only things that have changed my financial status during the span of my career. Everything from buying a house and subscribing to Netflix all had an impact, a large portion of which was offset by success in my career. There were birthdays and Christmas presents, trips to the hospital and surgeries, vacations and events to attend. Even with my success however I fell prey to financing a lifestyle that I couldn't support. Perhaps if I had had a better grip on my finances and looked at "short term debt" as a percentage of my pay I may have reconsidered that expensive vehicle. Maybe I would have taken my own advice and saved up a more robust emergency fund. There is a lot of value in hindsight but only if you leverage that knowledge to map your future.

Making Progress

     Now the important question, how to turn the tide and make progress? The first thing I did was to cut unnecessary monthly bills. I scaled back our TV package as we didn't spend a large amount of time watching TV so why did we have HD? I canceled a subscription to a video game that I wasn't playing very much any more. Little things like this help chip away at those big numbers. We also went on a budget for discretionary money. This has been the hardest part and one that I have honestly failed at more often then succeeded. It seems when people are given more money they fall into spending more money. The more money the more expensive the lifestyle. Going from not tracking a budget at all to holding myself to $100 a month is surprisingly hard. Scaling back is definitely a work in progress for me.

     I also include my outstanding debts in my budget spreadsheet. Each month I track how much is left to pay on them. Sure, cutting a $10 a month subscription to a video game isn't going to have a huge impact on the amount I owe on the vehicle but each month I watch as those outstanding debts get smaller and smaller. Eventually they will be gone if I keep on course.

Tangible Progress

     So far this year alone I have seen my total debt reduced by over 15%. While that still leaves a long way to go it also highlights one very important fact: It is working. I just need to make smarter decisions. I need to pay attention. It took years to build this debt, it will take years to pay off but I'm off to a great start.