My client Ginny came to me in April of 2022, looking to learn how to budget, get out of debt, and feel more in control of her finances. Ginny is single, owns her own home, and is self-employed (she runs a massage therapy business out of her home).
Ginny originally told me that her gross income was in the neighborhood of $35,000 to $40,000. Once we got started, we discovered that she actually makes more like $60,000 gross. But it’s not all that unusual, for someone who has never budgeted, to not actually know what their income is, especially for the small business owner, and I’ve seen this happen even with W2 employees.
Ginny had 4 debts besides her mortgage, totaling just under $8,000. She had just about $1,000 in savings, so her Baby Step 1 emergency fund was complete. She owes about $60K on her home, which is worth about $110K.
Our short term goals early on in coaching, besides getting her started on a budget, were to help Ginny get better at predicting both her business income and business expenses in advance, to consolidate and simplify her bank accounts, and to straighten out an old mixup over a loan payment that was incorrectly sent to the wrong account (which would result in her getting a sizable chunk of money back).
So as part of the custom budget template I made for Ginny (like I create for every new client) we designed a separate budget page specifically for her needs in predicting and tracking her clients and their payments in her business, plus another page to specifically budget and track business expenses. This then allowed Ginny to know just how much income she could “take home” from her business each week to add to her household budget. Yet they were both combined in one document for easy access.
Ginny takes money from her business once a week, at the end of the week, so we made sure that for each new month’s household budget, she carried over enough money from the previous month’s budget to cover the first week’s expenses in the new month. (For W2 employees who get paid every other week, that carryover amount is more variable, and usually larger, as the first pay of the new month could be as late as the 14th.)
After those initial tasks, we got Ginny started with a separate sinking fund (separate from her emergency fund, that is) initially just for school tax (a notoriously big annual bill which was coming up soon), and then we added some for house repairs, tires and Christmas.
Ginny was meticulous in her budget entries and in keeping them up to date, right from the start. I was pleased to learn that I did not have to remind her or nag her to do it, or reprimand her for neglecting her budget. She updated it several times a week, and whenever I checked in on her budget, I always found that there were no line items overspent, and her overall budget was always “zero-based” (every dollar of income was assigned to an expense category).
That simple attention to the task on a frequent basis was a key ingredient in her rapid success. The longer you wait to update your budget with your actual expenses, and make any adjustments needed as a result, the bigger the problems grow and the harder it is to fix them. When you attend to the budget every couple of days, the time it takes is minimal. And you become very familiar with the numbers that way as well, which helps you remember the key categories where you need to be extra mindful of your spending.
And because Ginny was so familiar with her budget, it wasn’t very long until she jumped in and started creating the new budget each month on her own, instead of needing me to do the initial steps for her.
Ginny paid off the first of her 4 debts in her first full month of budgeting. She paid off the second debt in her second month, plus half of her 3rd debt (her car). In the third month she finished paying off her car. THAT was a huge relief, even though it wasn’t her largest debt. Ginny’s final debt will likely be paid off by the end of November, or worst case there may be a small bit more due in December.
That’s the nature of the debt snowball, though. You pay off the smallest debt first, and usually very quickly, which is highly motivational. Then you take the amount you were paying on that smallest debt and add it to what you were already paying as a minimum on the second smallest debt. Thus the “snowball” rolls downhill and picks up more snow (money). Your payment on what is currently the smallest debt therefore grows larger with time. But still the larger debts generally take more time to pay off than the smaller ones.
So Ginny will have knocked out $8,000 of debt in about 7 months. She has accomplished this by paying about 20% of her monthly income on her debt (including both minimum required payments and extra on her smallest debt). She didn’t have to get a second job, or even make huge sacrifices in her lifestyle (though she lives fairly frugally by nature anyway). All it really took was some organization, and paying attention to both her income and her outgo by creating and sticking to a written budget.
Maybe $8,000 doesn’t seem like a huge pile of debt to pay off to some people. But keep in mind Ginny did this while also saving for and paying large property tax bills, large annual business bills, replacing a major appliance, paying some large medical bills, and funding a nice trip and celebration for her daughter’s graduation.
Along the way during our coaching relationship, we also made sure Ginny had appropriate, and competitively priced, insurance policies (auto, home, and disability, primarily), a will and powers of attorney in place, and we got her savings (emergency and sinking funds) moved to an online bank to take advantage of the much better (and rapidly rising these days) interest rates.
Ginny should have her minimum Baby Step 3 emergency fund in place by the summer of 2023. She can then start funding a Roth IRA, continue to beef up her emergency fund, and also save up for other house improvements and her next car. And it won’t be long then before she starts paying extra on her mortgage so that she can pay the house off much sooner than the mortgage calls for.
Here’s what Ginny had to say about her experience this last 6 months:
“Before I started budgeting with Bev, I had the feeling of “I will never be able to do things like a vacation, start retirement, house repairs etc.”. Now, it's changed to “I can do this!” with planning!”
Your situation may be much more complicated than Ginny’s. You may have a much bigger pile of debt to plow through. Or you may not. But wherever you are, all it takes to succeed is the decision to start.
Even if you have an elephant to eat, the way to do it is one bite at a time. I can show you how to take that first bite. Let’s talk about your situation, so you can find the hope you need to get started.