If you caught my last post you know that we recently hit a major milestone and paid off $60k in debt. This definitely didn’t happen by accident and took a lot of upfront work along with some monthly management. We follow the Dave Ramsey plan and he has tons of resources and booklets to help you along the way so I encourage you to check him out. All the resources on our Finances and Budgeting page align directly with his plan and baby steps. We have already covered the first sheet – debt payoff goals. So if you are just starting out go back to that post and then come to this post next. This post is going to cover sheet two – household expenses.
We took Financial Peace University (Dave’s class) this past fall and one of the biggest areas people in the class had questions about was how to get started. Like what EXACTLY are we supposed to do with our money. The workbook offers a lot of information on monthly money management but we sort of were on our own with how to get started and what to do with the actual money we had in the bank.
I bought my first house when I was 21 and had 3 roommates. I definitely was not financially responsible and my mom suggested I set up a separate account for all my household expenses. I would pay rent to myself and deposit all the rent from my roommates into this account. I always had enough for all my bills and even some extra for household emergencies. We continued this practice after getting married and it helps us keep all our money accounted for and separate from our day to day purchases.
Step One: Set Up Your Accounts
This step is super easy and for most banks all it takes is a phone call. At the end of the day you are going to want to have 2 checking accounts and 2 savings accounts.
- Personal Checking Account: This is for your day to day purchases, groceries, gas, shopping, and any other items that aren’t a normal monthly purchase.
- Household Checking Account: This account is for your monthly/bi-monthly household bills. Your mortgage/rent, gas, electric, cell phone, cable, gym membership, and your credit card and student loan minimum payments. Anything that has a due date goes here.
- Emergency Savings: This is your first baby step. You should put $1000 in this account and you do not touch it unless of an emergency. If you don’t have $1000 then start with as much as you can and get it up to $1000 before you start paying off any other debts.
- Extra Savings Account: This account is for your debt payoff money and for any other times you need to save up. For example we may have to pay taxes this year so any extra money for the next few weeks goes into this account. This helps from not getting it mixed up with your spending cash, household money, and emergency funds.
If you are still confused let’s do an example. Sally and Frank are starting their debt free plan and currently have $3,467.10 in their current checking and savings accounts. They open their four accounts and calculate their household payment to be $2,345 per month (you will know this number at the end of this post!)
Emergency Fund: $3,467.10 – $1000 = $2,467.10
Personal Checking Account: $2,467.10 – $400 = $2,067.10
House Account (60% of your total monthly house payment): $2,345 * 60% = $1,407
$2,067 – $1,407 = $660
Savings Account: $660
While you are on the plan you would then use the $660 to make a payment on your current debt focus (found at the top of your debt payoff sheet.) If you are confident in your budgeting and expenses you can go ahead and do that. If you are unsure about your monthly spending and bills I would leave the money in your savings account for the first month in case you calculated wrong. After your second month of budgeting, you should feel confident to throw this money at debt.
Most banks have a great online system or app so this should help to make managing and transferring your money a breeze. Once you have your accounts set up we move onto calculating our household expenses.
Step Two: Managing Household Expenses
This next part will take a bit of time but once you have it organized it will make paying bills a breeze. Using the “Household Expenses” sheet from your Happy Camp Budgeting Printables jot down every bill you have that has a due date. Our bills are electricity, gas, internet, trash, our mortgage, cell phone bill, water, car insurance, Hulu, Netflix, gym membership, CBS All Access (Survivor!!), and our life insurance bill. We also add in our car loan payment and our minimum payments for our student loans which you should already have noted down from the first post for the debt payoff sheet.
Once you have all your bills written down and the average bill amount you are going to go through and check either the 1st or the 15th along with “auto” if they are on auto pay. Any bills due between the 1st and the 14th of the month you are going to check “1st.” Bills due between the 15th and the 31st you are going to check “15th.” Now when you pay bills you only have to pay them two days a month – on the 1st and the 15th. You could pay them a bit earlier if you wanted to but it breaks down your bills into two sets and has a little checkbox to mark that it has been paid.
Step Three: Running a House Expenses Income Audit
Next, you are going to total all the bills and write that amount in the “Total” blank. You might need to do a house expenses income audit if it is very high. Your household expenses should not total more than 40% of your monthly income.
Our monthly income is around $5000 so our monthly expenses need to be less than $2000. We are currently at $2877 including our debt minimums and car payment so once we are debt free we will be right on track.
If your amount is too high think about ways to cut back. Do you really use that gym membership? Can you cancel cable? (We did! And saved $1200 a year) Maybe you need to sell your car and drive something more affordable. Really evaluate what all of your costs are and try and get to at or below 40%.
Step Four: Scheduling Your House Account Payments
Once you have a set monthly total (which is your total monthly house account payment) you are going to divide it by your pay periods. JR is paid weekly so we divide by 4 ($719). This is going to be the amount you pay into your house account weekly. When your paycheck/s get deposited you transfer this amount into your house account. If you are paid twice a month (I am) then you divide by two and transfer twice a month. It takes a bit of math and scheduling if you are married. If you do this every time you will always have enough money set aside to pay all your bills.
When you first start and have your accounts open I would try and put 60-70% of your monthly total into the house account to get started. This should cover you for the first half of the month and give you a bit of wiggle room for your first few months budgeting. After 3-4 months of budgeting you should know your expenses well enough and you can transfer any surplus to your savings account and use it to pay off DEBT!
If you have any questions or get confused don’t be afraid to shoot me a message on social media or send me an email! It can be tough to get started and organized but it will be a breeze once you get going!
The next and final sheet is about your monthly budget! Check out this post for help completing your monthly budgeting form.