Basic Budget – Check that Net – Positive Value

Posted on Posted in Personal Finance
Basic Budget – Check that Net – Positive Value

This is a great achievement, positive net. This is what we’ve been shooting for. You should be proud of yourself for getting this far. Nonetheless, there’s more to do. If you’re still carrying bad debt (like credit card debt, student loans, medical debt, etc.) we need to address that. The only way to address this bad debt is when we have a positive net. Remember the positive net occurred after covering all our monthly expenses. These are the funds we need consistently, month after month to live.

Next Steps

The process of going from a negative net to zero was iterative. That process continued until we went from a zero net to a positive net. Now we are going to ‘reduce or even eliminate’ that positive net in order to apply those funds to that bad debt. We’re going to need that list you created outlining all debt sorted by interest rate. We’re going to attack the higher interest rate credit cards first.

Prep Work

Let’s get the things we need.

  1. Accurate budget
  2. List of prioritized debt
  3. Notes taken from our conversations with the companies we owe money too and the results of these discussions,

As noted previously, you’re going to need that list of prioritized debt. Further, you should really stop using your credit cards. Some say cut them up. When I went through this process many years ago, having some auto-pay tied directly to my credit card or bank was pretty rare. For me not using my credit cards was the path I chose. Today some may have utilities (like gas, electric, water, etc) auto-payed by credit card (or checking account) monthly. Same may be true for streaming services, cell phone, etc.

If your budget was correct, then all those monthly living expenses have already been recorded. It may not be feasible to remove the auto-pay option (maybe you get a discount from auto-paying). Whether you continue auto-pay or not, you’re going to need to be disciplined. Remember previously we had an exercise on contacting the companies we owed? Yeah, we’re going to need the results of that too.This is where we’re going to separate the adults from the wanna-Be’s. To many have some entitlement mentality where they ‘deserve’ to have this or that. These people are really not interested in eliminating the debt they accumulated, rather they want to continue to behave financially the way they always have. Your debt is yours and it’s not going away unless you change your spending behaviors. Time to put on the big boy/girl pants. There’s work to be done.

Go To Work

Let’s look at that positive net value as well as our prioritized list of debt and notes . We want to attack that highest priority debt first (remember we said there can only be ONE highest priority). Once this highest priority debt has been eliminated, we move onto the next. Another iterative process. Keep doing this until all existing debt has been paid off. This may take a long while to achieve (took me a few years to fully eliminate my debt). Here’s a little trick you can use. I think an example may be helpful.

Example

Let’s say you have a positive net of $150.00 and you have 5 accounts that are bad debt. The highest priority debt gets the most money applied to it, then the payments are high to low for the remaining accounts.

Highest priority account: $75.00

Second account: $30.00

Third account: $20.00

Fourth account: $15.00

Fifth account: $10.00

Your end result brings us back to a zero net value. That’s OK.

Iterative Process

Once we get the highest priority account paid off, we use those funds and add that to the ‘new’ highest priority account..

  1. Old highest priority account: 0 – was $75
  2. New highest priority account: $105 (was $30 so we add the previous account payment value of $75)
  3. Next account stays at $20
  4. Next account stays at $15
  5. Next account stays at $10

Our top priority debt account has been paid off and that payment was added to the next priority account (which is now our top priority account)

  1. Fist account has been paid off
  2. Second account has been paid off
  3. Third account monthly payment is now $125 (the previous account payment of $105 + the previous payment amount for this account -$20)
  4. Fourth account stays the same
  5. Firth account stays the same

Conclusion

The conclusion to this process may take years. You didn’t get into debt overnight and you won’t get out of debt overnight. You’re going to need discipline and stick to your plan. You can also modify this approach as long as it’s in a good way. An example of a good way would apply when you start to bring in more income. This could be a raise at your job, a new side hustle, etc. If you’re generating additional income then you can increase your payment amounts above. Please don’t use that extra income to indulge yourself. Our priority is to eliminate your debt and start saving for the future (like retirement or a home, a bucket list trip, etc.)

Going through this process you’ll discover a lot about yourself. You will become more aware of how much money you have coming in as well as going out. You’ll have a financial discipline you’ve never experienced before., You’ll also have a better image of yourself., There was a problem, you identified it, accepted it and did something about it. Congratulations. You’ve earned it.

More to Come

There’s more to come. Once that debt is paid off and we’re back to a positive net value we can then begin to build our wealth by making that positive net value work for us.