You will never get out of debt by paying the minimum on your credit cards. If you have loans or debt with a higher than 7% APR, I recommend you focus on paying this down as quickly as possible. So, you might ask, where do I start?
1. Analyze your spending. I recommend Personal Capital, but any expense software will work.
2. Create three budgets; current spending (your current fixed and variable expenses), planned spending (adjusted spending targets), retirement spending (how much you need for retirement if this is your objective).
3. Reduce your expenses and focus on paying down debt. I used a snowball method to pay off some smaller balances and then use those dollars to attack higher interest balances. When you have reduced your debt, then apply this money to increase your savings and investments.
After analyzing your spending for a few months, you may be surprised at where your hard earned dollars are going. Here is the breakdown of my spending (from net income) for comparison, not including savings/investments. These are not exact figures, but will give you a general idea.
As you can see, the mortgage is our biggest expense, followed by groceries, and general expenses. The high cost of automobiles coupled with full coverage insurance and regular maintenance/repairs, is also a major drag on the budget.
From a mortgage perspective, we recently refinanced to take advantage of the lower rates. We didn’t reduce our payment, but we were able to get a shorter term mortgage for basically the same monthly cost. We plan to have the mortgage paid of by the time we retire, or very nearly after early retirement.
We have had several automobiles over the years, but have always bought used, and generally keep for 6-10 years. If you have a good driving record, it is a good idea to get new insurance quotes every few years. There are several online sites which will help you find the best rates for your situation. Due to COVID, our stops at the gas pump have been far between, so we have seen some savings there.
I made the decision a few years ago to “cut the cord”. Right after this became a popular way to save money, we shutoff our DirecTv service, which we had for years, and made the switch to Hulu Live. This cut our monthly television expenses in half. We have since added on a few premium channels, since we aren’t leaving the house much for other entertainment, such as going to the movie theatre.
Recently, I reviewed my current cell phone usage, and since we aren’t leaving the house much do to COVID, we made the decision to switch to a T-Mobile prepaid plan. We were able to keep our numbers and reduced our monthly cell phone costs by 7x. We just completed our first month with the new service, but no issues so far. We will continue to monitor our usage and adjust as needed.
Utilities can also be a drag on the budget. You can reduce your monthly utility bills by switching to low cost lighting. We use Hue smart bulbs, which have a higher upfront cost, but long life span and added benefit of integrating with our smart home. A few years ago, I also switched out the old HVAC thermostat for a modern version with scheduling capability. During the summer months, keep your outside HVAC unit clean and clear of weeds/debris. Make sure all windows and doors remain closed as much as possible during extreme temps and have a good seal. If you are able to adjust your hot water heater temperature, this will also help to reduce your energy bill.
While these small adjustments may not have a huge impact month to month, you will see significant savings over time. For reducing debt and increasing your savings/investments, every dollar counts!
Disclaimer: I am not a licensed financial planner or tax expert. Any views expressed are my own and based on what I have learned on my financial journey. Please do your own research before making important financial decisions.
Fire Dog Personal Finance 