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Archive for the Money Category

Establishing Your Emergency Fund

Our first step to getting our financial act together was to establish our emergency fund. We had no intention of fully funding it before we paid off our debt, but we knew that we needed a little bit of a cushion between us and life so that we could avoid going further into debt as we paid off what we already had.

Setting up a Starter Emergency Fund

Emergency Fund

Why should I have money in the bank when I’m trying to pay off debt?

Having money set aside in the bank will allow you the chance to continue to work towards your financial goals in case the unforeseen happens. Money in the bank takes the stress away if you face an unexpected car repair or medical expense. You’ll feel relief knowing that you are prepared for a little bit of life to happen while you continue to pay off your debt.

Where should I keep my emergency fund?

You want to make sure that your emergency fund is accessible without being too accessible, that way a take out pizza or a new pair of shoes don’t become an “emergency”. We have ours in a savings account that is accessible online but not with my debit card. Within 24 hours I can have the money transferred to my checking account if an emergency was to occur.

emergency fund

How much should I have set aside?

Keep in mind that your starter emergency fund is not your fully funded emergency fund. While you’re focused on getting out of debt, you want to set aside an amount that would cover most minor emergencies. For our family of four, that meant having $1000 set aside. You may not need that much if you’re single with fewer expenses, while some might feel comfortable with having $2000 or $3000 in savings.

When should I start my emergency fund? garage sale

As soon as you possible, you can never be too prepared. If you already have savings in the bank, it’s as simple as earmarking that money as your emergency savings. No money? No problem. It’s time to look around the house and start selling stuff online or gather up your goods and plan a garage sale. Perhaps you can pick up some extra hours at work or pick up some extra work. Don’t forget to take a look at that budget and see where you can squeeze to save up the money.

With any luck you won’t need to use your emergency fund, but what a feeling of relief it is to know that if life does happen, you’ll feel be for it. Your emergency fund, although just a starter one for now, will bring your one step closer to building your own personal freedom.

 

Your Turn!

  • What does financial freedom mean to you?

 

Using Cash to Stay on Budget

When I was young my mom used to joke that cash would burn a hole in my pocket, if I had cash on me, I felt the urge to spend it. Needless to say then, I was a little apprehensive to use cash to stay on budget, but since making the switch I would never go back to using plastic.

cash is king

Why Cash is King

  1. Psychological: When you spend cash, research has found that you feel it more than when you swipe a card. It hurts a bit more when you see your hard earned money leaving your hand, which means that you’re less likely to purchase things that you don’t really need.
  2. Easier to stick to your budget: When the cash is gone it’s gone so you know when it’s time to stop spending. Our cash categories include groceries, personal spending money, clothing, as well as setting aside money for any smaller miscellaneous expenses (think field trip notices from the school or birthday party gifts). When my personal spending money is gone, I know that it’s time to hold back on spending any more money until the next month. paying with cash
  3. No risk of going into debt: I know several people that swear by their credit cards because of the points that they get. I also know that nobody signs up for a credit card with the intention of getting deep into debt, but the reality is, according to statistics, the average card carrying American household owes $16,048. If you commit to using cash, you don’t have to worry about overspending and dreading the monthly credit card statement.
  4. Delayed Gratification: Spending cash means that there are times that you will need to save up for a bit before making a larger purchase. This will give you some time to really think through the purchase and decide if it is in fact something that you want to do. If you decide that you do want to invest the time to save up and pay cash, you leave with with not only your purchase, but a great feeling of knowing that you were financially responsible, did not act impulsively, and know that you were able to do it without going into debt.
  5. Less Guilt: Imagine what it would be like to go shopping without any guilt at all.  When spending with plastic, it’s easier to make impulsive purchases because you don’t feel as if you’re parting with your money which puts you in a position where you’ve come home with unplanned items and guilt. When you budget and use cash, you are giving yourself permission to spend which means nothing but guilt-free shopping trips.jar with coins
  6. *BONUS* The Change Jar = Extra Savings: When you use cash for your daily and weekly purchases, you are going to end up with a lot of spare change. Put this change into a jar and you’ll be amazed at how much you have saved up by the end of the year without even realizing it. Last year I managed to save up enough coins to cash in $160 which paid for my daughter’s Christmas stocking stuffers!!

Your Turn:

  • What categories could you use cash for to help you stick to your budget?

How to Make a Budget

If you’re looking to get control of your finances the first thing we need to do is make a budget.budget

If that word makes you squirm and you assume that a budget means not being able to have fun anymore, please know that I felt the same way too. I can assure you though, after 3 years of making a new budget for each and every month, I’ve found that living on a budget has not been restrictive, it has been freeing.

It gave us permission to spend what we could afford which means there is no more guilt coming home from a shopping trip because the purchases are planned and budgeted for.

 

Wait…Did you Say Monthly Budget??

You did read that right. Yes, my husband and I make a new budget for each and every month before the month begins and here’s why you should consider it too:

  1. Some months we have 4 paychecks and other months we have 5. We want to make the most of our income each and every month, so by setting up a monthly budget we can be sure to make the most from that “extra” paycheck
  2. You may not have the same expenses every month. Although many of your fixed expenses will occur every month, other bills might not be due every month. My water bill comes in the mail every 3 months and thankfully I don’t need to plan a birthday party for my children every month.

computer budget

How to Make a Budget 

  1. Start with your total income: At the top of your paper, you will write down all expected income for the coming month.
  2. Subtract your fixed expenses: The first group of expenses I take away are the fixed expenses that pertain to the four walls, the expenses that allow me to continue living where I live and get back and forth to work. These include Mortgage/Rent, Utilities, Transportation (loan payment if applicable and fuel), Groceries, Minimum Debt Payments, Clothing.
  3. Subtract your variable expenses: These are the expenses that can change from month to month or are considered the nice to haves. Think Magazine/Newspaper Subscriptions, Personal spending money, Dining out, or Entertainment.
  4. Find out what’s left: This is the moment of truth, it’s time to subtract your fixed and variable expenses from your total income. If you have money left over, this is the money that you can use to put towards paying down debt or set aside for long-term savings.If you have a negative balance, it’s time to look at ways to cut your spending (link to future blog) or increase your income (link to future blog).

balance income and expenses

Bringing it all together:

Now admittedly, I’m a pen and paper type of budgeter. You may feel more inclined to create a spreadsheet. Regardless of how you prefer to budget, the important thing is that you are taking control of your finances and telling your money where to go instead of wondering where it went.

If you are a paper and pencil type, this is my all-time favorite template to use. If you think a spreadsheet might be more your style, you can watch my husband and I give you a quick tutorial on how to set up a basic budget using Excel.

 

Your Turn!

  • Are you a paper and pencil type or a spreadsheet type?

Estimating Income

I often listen to the Dave Ramsey podcast where people will call in with their money questions. Most of the time he’ll ask the caller what their estimated income is, and I am amazed (and not in a good way) at the number of people who aren’t sure.

When setting up our monthly family budget, the very first information I enter is our expected income. From that number, I then know how much I have to cover our monthly expenses and how much we can save for the future.

money

Let’s look at the three things to consider when estimating what your monthly income is going to be.

  1. Hang on to Those Pay Stubs: If you are a salaried employee (like myself), estimating your monthly income is a matter of looking at what you get paid each pay period and multiplying that by the number of pay periods that month. If you don’t have your pay stubs, go online and see what was last deposited into your bank by your employer.
  2.  Estimate your Monthly Average: If you have a variable income (meaning it may not be the same each pay period), you are going to want to find out what has been your average income. Look over your bank statements for the last year and total up your income (you could also look at last year’s tax information to determine your yearly income). You’ll next want to take that total amount and divide by 12 to figure out what your average monthly income would be.

adding up money

If you are in a field that varies greatly depending on the season, take a look at what you made this month last year to help you determine what you might make this month.

3. Don’t Forget All Sources: Your income does not just include money earned through your job. Don’t forget any other source of income you might have. Other sources of income may include, but are not limited to:

  • Government benefits
  • Investment earnings (if you are not reinvesting)
  • Rental income
  • Child support / alimony
  • Even that tax refund you might be expecting.

If you are self-employed, you may also be interested in what it means to estimate your income in a worst case scenario .

Your Turn!

  • How do you approach the budgeting process?

 

Your Debt

If your financial goal this year is to get out of debt, you’ll first need to figure out what your debt is. We knew we were ready to face the music when we felt the weight of our debt. We knew it was probably going to be a lot, but soon found out that it was a lot plus another $10,000.

If you’re ready to rid the burden and weight that is debt, follow these simple steps to help you identify your debt and then we can start looking at ways to attack it.

calculate debt

 

How to Determine How Much you Owe 

Make a List of Everyone You Owe: Gather up your statements and print off a copy of your credit report. Listed on your credit report will be all companies that you have credit with and how much you owe as of the last time it was reported (this may not be updated every month, so it’s always good to check the latest balance on the statements or online).

It is a good idea to check it on an annual basis anyway to make sure that the information is up to date and there aren’t any errors or possible fraud. You can obtain a free credit report here .

credit report credit score

Find out Everything You Can About Your Debts: You’ll want to find out the following about each of your debts:

  • The total amount owed
  • The minimum payment for each of your debts
  • The interest rate
  • When each payment due (monthly, quarterly, annually)
  • If it is an installment loan, the date when that debt is scheduled to be paid off.

 

Assess Your Situation:  Although this may seem scary, remember that this is just the starting point and it’s only going to get better from here.

  • First, add up the total amount of debt you owe. This may number may seem scary and overwhelming, but remember it won’t be that number for long because we were going to be knocking it down.

buried under a pile of debt

  • Next, take the amount of all of your minimum payments and add them up. This the minimum amount of money that you owe on your debt every month. Again, this can be overwhelming depending on the amount of debt that you have, but those payments will seem more manageable once you start eliminating those bills.

 

The other thing I realized about myself when I added up all of the debt was the amount of money spent to keep up with the Jones’. None of our debt was the result of a medical or financial crisis. It was all just stuff, items purchased to impress. After reading this blog post though, I was happy to know I wasn’t alone.

Now that we have faced the music, let’s look at some different plans of attack and figure out which one will work for you. 

Your Turn! 

  • What would having no more debt payments mean to you?
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