Last week we took a look at Lars and Laurel Luxury’s loan balances and realized that they still have $50,000 in debt. With the help of a handy debt calculator, Lars and Laurel made a goal to be completely debt free in only 3 ½ years.
However, in order to do that they need to find some extra cash. To be more specific, they need to come up with an extra $350/month to speed up their debt repayment. That’s a considerable amount of money, so they need a bit of help.
The “Find the Fat” Approach – How to Find Extra Cash
If you needed to free up an extra $25/month, you could probably do so easily. You’d cut back on one restaurant per month or drop your cable package a step, but it probably wouldn’t take a lot of thought. On the other hand, finding an extra $350/month like Lars and Laurel need to will take a lot more consideration.
Getting out of debt often means temporarily sacrificing a few of the luxuries that probably contributed to your debt in the first place. You’re going to need to cut back somewhere in order to reach your goal. The question is “where?”
3 Steps to Finding & Skimming the Fat
1. Take a close look at your budget or expense tracking worksheet
Hopefully, you keep track of at least one of these two items. If not, please do. I promise it will change the way you look at your finances. Why? Because the first step of changing the way you look at your finances is, of course, to actually look at your finances.
2. Find your bare minimum
Imagine that you go into work tomorrow and, as you head up to your cubicle, your boss gives you that same smug smile he always gives you, tells you the same corny joke he’s told you the last 4 mornings in a row, and calls you “slugger” as he motions for you to fetch some more coffee.
You then walk into your office only to find out that your cubicle neighbor has fully committed to the new garlic and cabbage diet that’s currently taking Hollywood by storm. She didn’t have to tell you…you just knew.
Later, you find yourself sitting in a “quick” 10:00 meeting stretching into its 3rd hour. At this point the only thing keeping you awake is your empty stomach and your boss has begun to sound like the Charlie Brown teacher. All of a sudden, before you even realize what you’re doing, you scream out “I QUIT!” sending papers and files catapulting across the room with the force of your declaration.
Some of you are giddy at the thought
But, let’s get back to reality. Whatever the scenario that brings you there – imagine you no longer have an income. What would you do?
You would need to analyze each and every category to determine where you can save and scrimp…out of necessity.
Hopefully, that’s not the predicament you currently find yourself in, but it’s a good exercise to do – especially if you are determined to get out of debt quickly. Let’s find out how low we can go. Don’t worry…you don’t have to necessarily stay there – we just want to determine “rock-bottom.” I promise you don’t have to become Amish if you don’t want to.
Questions to Ask to Determine the “Bare Minimum”
1. Is this expense 100% necessary?
You may really want it but if you don’t NEED it we’re going to set it aside for the time being. Expenses like television, going out to eat, and internet would fit into this category.
2. Even if the expense is necessary, am I spending more than I NEED to on it?
For example, we need food to survive, but we don’t need to spend hundreds of dollars each week. Many people don’t realize how little money can be spent if you put your mind to it. Even though you can actually spend even less, $2 per day would probably be a good place to start for most people. So, in this case, you could consider anything over $2 per day (per person) unnecessary and set it aside for now.
3. Am I locked into an expensive contract or in a situation that I can’t get out of?
If all you have to do is spend $75 to get out of your 2 year cell phone contract, it may very well be worth it, but several hundred dollars to skip the last 4 months of service doesn’t make a lot of sense, no matter how cheap the next step down in coverage may be.
Another obvious example is your mortgage. You may realize that you have too much home and could save a lot of money by renting or buying elsewhere, but if you’ve been unable to refinance or sell, you may need to consider your mortgage as a bare minimum expense and simply work around it.
Once you’ve analyzed each category, come up with a new “bare minimum budget”.
3. Add back expenses one at a time based on your priorities
Ok, here’s the part you’ve been waiting for. You get to start spending money again!!
More accurately, you get to begin picking expenses that are not considered “bare minimum” expenses, but you have no interest in living without – even if it’s only for a couple years until your debt is paid off. Add back expenses one at a time. The first one that you choose should be your highest priority and so on.
The reason that this exercise is helpful is two fold:
1. It helps you establish your priorities.
Stripping down your expenses allows you to start over and decide where your money should really be going. Many of us have been spending our money without a real plan for years, maybe decades. Our finances have become too complicated and convoluted, so we sort of give up and keep living the status quo. Apathy sets in. I’ve seen it SO many times with our customers at the bank where I work.
So, let’s start over. What if you were given a new start? What would it look like? You may have made some financial mistakes in the past that won’t allow you to truly start over from scratch, but taking your current situation to rock-bottom and then adding expenses one-by-one based on your priorities might allow you to feel like you’re in control again. Because YOU ARE in control of your finances.
2. The “Fat” becomes more obvious
Just as the true glory of my belly fat is partially hidden by my t-shirt, our financial fat may lie undetected until we shed some more light on the subject. As soon as I rip off that t-shirt like any good television life guard would do (probably in slow motion), my bloated belly is revealed and no longer has anywhere to hide. So, I guess we want to take our budget to the beach? I’m sorry, I don’t know where I was going with that analogy. Forget I said that.
Let’s use Lars and Laurel again as an example.
If their “rock-bottom” budget showed a $750/month margin (the difference between their total income and their total expenses), they can start adding back expenses until their margin shrinks to $350/month. Remember, that’s the amount of extra money that they originally wanted to find in order to apply it to their debt repayment. So, if they want to make sure that they leave a $350 margin when it’s all said and done, they have $400/month that they can feel free to add back if they so choose.
Sports Fans – think of this process like a draft. You’re drafting your expenses in the order you love them most. You keep going until you’ve found the appropriate amount of fat for your situation.
What did Lars and Laurel choose?
- As someone who loves nothing more than to search for new “boy bands” even if they don’t sing in his language, Lars immediately adds back a little Itunes money into the budget. It was his first choice. You are who you are I suppose.
- Laurel, worried that her husband is going to spend the rest of their money on Backstreet Boys posters, decides to add some cash to their entertainment fund (nights out). The “bare minimum” had taken that category down to $0 and she wanted to make sure they had enough cash to get out of the house here and there. So, she immediately makes sure she adds $75 back into the budget (half of what they used to spend).
- Then they take a closer look at food. The bare minimum was considered to be $120/month for the two of them, but they like to buy organic produce as often as possible and Laurel has a girl scout cookie addiction that she’s not willing to forego unless it’s 100% necessary. So, another $80 is added and both of them feel good about their decision. Much like entertainment, their new budget will be considereably less than the old one, but they are willing to buckle down and reign in the grocery budget a bit by becoming more mindful of what they are buying and finding some tasty, inexpensive recipes.
- After adding a small clothing stipend, making room for an $8 Hulu Plus subscription, and, of course, adding back the internet – was that ever really in doubt? – they reach their limit and have to skim off the rest as fat.
Here are just a few of Lars and Laurel’s monthly expenses
You know how the fat always comes up to the top when you toss some gravy in the fridge? That’s what we’re doing here. We want to isolate the fat and then just skim it right off the top like mom always did with the gravy.
Yes, that means living without a few luxuries for the next couple years, but we all know it will be well worth it in the end. The point is to get out of debt quickly. No one said it was going to be easy.
Obtaining debt is much more fun than paying it off. Spending more is always more fun than spending less. There’s a reason that Disney World doesn’t name their rollercoasters “Financial Discipline” or “Restraint”. They don’t exactly scream fun! However, the end result will still leave you cheering.
So, find the fat and cut it out. This is the one and only time you’ll hear me recommend plastic surgery.
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