I’m probably showing my age, but over the years I got very used to “defragging” my computer’s hard drive on a regular basis. But ever since my way-smarter-than-me son-in-law Caleb set me up with a new computer with a solid state hard drive, that process is no longer necessary. So I haven’t heard the word “defrag” spoken out loud in a long time. But it came immediately to mind recently when I started analyzing the finances of a new coaching client of mine.
I sat down with this new client couple the other day. Early 30’s, 3 kids, house in the country, a teacher and a college professor. Just classic Americana all the way around, and sweet as can be. They had even coordinated Financial Peace University at their church a couple of times, a few years back. So they know the concepts that I teach.
But they have struggled ever since then in making progress paying off their debt. That’s why they called me.
They do a budget. They are frugal as can be. But no matter what they do they can’t seem to get any traction on their debt snowball. Super frustrating for them, I’m sure.
So as usual, I asked them a ton of questions in preparation for our first coaching session. I try to immerse myself in my client’s finances as if I’m living their life. Not just the numbers, but lifestyle, family, stuff about the kids, you name it.
Once I feel like I really understand their situation, I ask myself “Knowing what I know, what would I do if I woke up in their shoes?”
These folks were really only making one mistake. And it’s so simple, really. It was staring them in the face the entire time and they couldn’t see it.
So I asked them this question.
“Remember in the budgeting lesson of Financial Peace University? Picture Dave (Ramsey) standing on stage, telling you how to do a budget. What does he say is the VERY first step?”
The first step
If you’ve taken FPU, stop here and ask yourself that same question. What is the VERY FIRST step when you sit down to create your household budget?
Wait for it....
Wait for it...
You write your income at the top of the page.
It took a little prompting to get that answer out of them, as they kept jumping to later steps. But that’s still not the complete answer. What’s missing from that sentence? Again, you FPU graduates....say it with me.
You write the total of ALL your income (for the upcoming month) at the top of the page.
Aha!!! Ay, there’s the rub! (for you Shakespeare nerds). They weren’t writing down the total of ALL their income.
Here’s what they were doing wrong.
And I’ve seen other clients do it before, but not nearly to the extreme that these folks were.
Their budget had become fragmented, and needed to be “defragged”.
By that I mean they were only using their main job incomes for their budget – what they earned as a teacher and a college professor. The husband actually had 3 additional jobs at various times of the year. And the wife was good at selling items for extra money fairly regularly.
But they would say things like....
“His landscaping job pays for our daughters’ dance lessons.”
“When we don’t use a day or two of daycare, we use the extra money to go out and eat.”
“We use our tax return to fund our HSA.”
“When I sell some things, we use the money for lawn and garden maintenance.”
And not just their budget was fragmented. So were their bank accounts:
“We keep part of our emergency fund in one savings account and part of it in another savings account.”
So what’s the fix?
Pretty simple, really. ALL income for the month goes into the budget, and ALL expenses for the month are planned out in that same budget. ALL of the emergency fund is in one account. ALL of the sinking fund is in another account. Everything else is in the one (joint, if married) checking account.
Simple, but perhaps not easy for some people though, as this type of thing becomes an ingrained habit.
My clients in this example were gung ho to make the changes I suggested, as soon as I pointed out the problem. (And they are on fire now to pay off about $55,000 in the next 21 months or so.) But I’ve seen other clients who don’t want to change that one thing.
So WHY would someone not want to follow my advice and change this habit?
Because....separating out a source of income that funds something “special”, like a hobby, or a vacation, or even extra beers at the bar after work, allows them to do things they THINK they couldn’t do if they had to include it in the budget.
In other words, it allows them to put a higher priority on their favorite WANTS, than on NEEDS or obligations that are really more important. They cover the obvious needs in the main budget, but when it comes to finding extra money to put on debt, they want to hold back so they don’t have to sacrifice their favorite activity. Therefore, they make no progress on getting out of debt.
The truth is that when you put ALL your income in your budget, and plan ALL your expenses in that budget, you will think you got a raise.
The fear of missing out (FOMO as they say on social media) will go away, in almost every case, when you see that you DO have enough money to pay extra on debt, as well as fund many, if not all, of your personal wants.
And especially when you’re married, the budget process will force you to discuss ALL of the things you both want to do with money, and make you AGREE on what your priorities are, together as a couple. That discussion will improve your marriage and make you see that your own wants weren’t nearly as important as your goals as a couple.
If you need help defragging YOUR budget, schedule a free consultation with me. I can help.
Fix your money. Fix your life. I’ll help you. www.moneycoachbev.com