Budgeting / Credit Cards and Debt / Personal Finance

Fix Your Finances in 30 Days

Day 11: What’s Leftover? The Rest of Your Budget

Yesterday, we figured out exactly how much of your money – and your time – you spend with basic living expenses. From this, we determined what was left – the amount that we can use to pay off our debts and build our dreams.

A great rule of thumb applies here: you can reach your short term goals with debts, but you can’t reach your long term goals with debts. In other words, focus on your short term goals and for your long term ones, pay off your debts first.

Why do it this way? I call it the “dream” factor. Paying off debts isn’t romantic at all, but dreaming about the great things you can do in the future is romantic. Since you’ve defined five short term goals (and plans to execute them) that match your core values and also line up with your long term values, every step towards these short term goals is a step toward success – and living your dreams.

Sit down with a piece of paper and make a list of your five short term goals along with a list of all of your debts; you should already have these ready to go. Every step you take towards your short term goals should be matched with a step towards your long term goals, so you’re going to divide up your money and time investment equally between your goals and your debts.

Now, take the amount of hours you have “left over” after yesterday’s calculations and divide that in half. You’re going to spend half of them on debts and half of them on your short term goals.

It’s important to remember here that these debt payments are extra debt payments; in other words, you’re going to pay an extra amount each month to get the burden of debt off of your shoulders so you can walk freely and confidently into your future.

Why am I dealing with “hours” instead of dollars? For many people, dollars are an abstraction: they have a hard time directly associating money with the work that they do. Money comes in, money goes out, and that’s life. The truth of the matter is that every dollar we make is the result of some amount of time spent doing something for someone else. Time is something we all understand from our earliest days, and these hours are merely something much more tangible to hold onto.

How do I decide which debts to pay first? There is a lot of merit in the “debt snowball” concept, which advocates paying off the smallest debt first. For now, put the entire amount you have allocated for debts next to the smallest debt balance. We’ll worry about dollar amounts tomorrow.

What if I have no debts? If you’re lucky enough to be debt free, you can invest all of your extra money towards your goals. Take that half that you would have been using to pay off debts and apply them to your long-term goals as you see fit.

What about my short term goals? You can probably determine for yourself how to split things up among your short term goals. Look at your plans and decide which ones need more of your working time to make them come true, and which ones need less. Write them down.

Once you’ve figured this out, assemble a new “big picture“ using the one you created three days ago, along with the individual expenses (and the hours you spend on each of them) yesterday. Add in the hour expenditures you created today (including the ones with 0 hours assigned to them), and do a final check to make sure the hours add up to what you figured that you actually work each week.

Sit back and look at this sheet. In some ways, it’s a budget, but it’s something more than that: it’s actually a picture of you. This is what you work for each week, hour by hour. Maybe you work three hours a week so that you can keep your cable turned on, but you only work an hour a week towards a college education for your children. Do you feel comfortable or happy with this? Whether you do or don’t, there are so many things here to think about in terms of how you choose to spend your time.

Tomorrow, we’ll take this “time” budget and convert it all into real dollars – and begin the process of converting all this planning into some real action.

Ready? Let’s continue on to the next day.