One of the reasons the idea of budgeting is depressing for many of us is because it is the point in time each month where we realize we don’t have a lot of breathing room. There is simply no disposable income after the mortgage, the car payment, the credit card bills and the rest of our spending categories. What if you could take a magic eraser and wipe out all those debt payments?
Unfortunately, no magic debt eraser exists, but like I tell my son, “let’s pretend.” Let’s pretend for a moment that you do not have any debt. How much different might your budget look?
That’s the idea behind creating a dream budget, an exercise I have toyed with informally a few times, but was sold on after reading a post at Enemy of Debt. Here’s how I created our “Dream Budget.”
- Grab a copy of your most recent budget. Highlight the amount of total expenses, total income and any savings contributions you are making.
- Make a second budget minus any payments related to debt. Leave the mortgage payment for now, but remove credit cards, student loans and car payments.
- Using this new “dream budget,” calculate the difference between total income and total expenditures. This difference is the amount you are spending each month to service debt.
- Find a new home for the difference. What will you do with this new excess? If you are like most families with a $400 car payment, and several thousand in credit card debt, you could easily free up $700-$800 a month by paying off debts.
- Break out “savings” category into more targeted goals. Finally, there is enough money to invest in a Roth IRA, save for the kids’ college tuition, put a little away towards a replacement car, and maybe even a little towards a down payment on a new home.
What’s standing between you and your dream budget? Debt. Debt is like a soul-sucking black hole in your financial world. Being in debt is worse than the worst job you’ve ever had, and the worst relationship you’ve ever been in, combined. To put it bluntly, being in debt sucks.
Most of us are aware of this fact, at least intellectually, but by creating a dream budget you finally have evidence of the things debt is robbing from you with each required payment, and it has a way of getting you fired up, emotionally.
Consider just the interest accumulation on your debts. How would you react if your bank was reaching in and grabbing $148 a month out of your checking account? You would be outraged, and rightfully so! Well, that’s the equivalent of allowing credit card companies and other loans to tack on interest each month on a large balance of debt. Get rid of it once and for all, and free your budget up to do bigger and better things.
Keep this dream budget handy if you feel motivation for your get out of debt plan waning. It might just be the kick in the pants you need to get back on track and make your dream budget a reality.
When the time comes to set up your debt free budget, consider using Mvelopes to create a virtual envelope budget.