What happens when a family says “yes” to pretty much everything? A mushy budget and credit card debt.

magnifying glassEvery budget has its love handles. You know, those little indulgences that the budgeter “should” cut, but doesn’t. Usually, it’s not the end of the world. Every budget I’ve reviewed has had its fleshy midsection, but every one of those budgeters could make quick, significant progress in spite of the fat.

But what happens when every category carries a few extra ‘lbs’? Your budget gets…mushy. And nobody wants a mushy budget. It’s unsightly.

Chase tells me his (and his wife, Beth’s)  goal is to be debt free – not including mortgages – within two years. He didn’t specify whether he’d like to pay off the home equity lines of credit along with the cards and the car, but I’m assuming he wants them gone (because why wouldn’t he?).

First, the debt table:

Loan Balance Interest Rate Payment
Credit Card 1 $4,364.62 13% $109
Credit Card 2 $2,650.72 6% $66
Credit Card 3 $2,555.77 0% $64
Car $10,649 3.1% $395.04
Home Eq. Loc 1 $31,000 ? $285.34
Home Eq Loc 2 $15,375 ? $110
Loan Totals $66,595.11 $1,029.38

A hefty chunk, but given Chase’s budget, you’ll find he can be rid of all that debt in two years without much sacrifice.

Budget Background: Chase is a software developer; Beth is a server at a restaurant. Their combined average take-home pay (averaged out over the seven months of YNAB data they shared with me) is $8,513.42. That number includes income from their rental property.

Chase’s health insurance and 401k contributions are withheld from his paycheck. Worth noting that between his contribution and his employer match, he’s saving 12% of his gross in the 401k. He’ll soon be bumping that to 16%.

Category Budgeted Notes
Pre-YNAB Debt All these debts have balances, but Chase hasn’t ever assigned dollars to these categories (in the last 7 months, anyway). What that tells me is he had  a bunch of cash in the checking account from a work bonus early in the year, and he’s used the extra cash to make big monthly payments to the cards. Unfortunately, this year’s spending has outpaced the payments, so he still has balances.
Credit Card 1  $0
Credit Card 2  $0
Credit Card 3  $0
Pre-YNAB Debt Total $0
Mortgages and HOA Fees
Home – 1st Mortgage $1,542.95 Current balance is around $173,000, and they’ve been in the house less than 7 years. Chase estimates his home value at $237,000.
Home Eq. LoC $285.34 To get 100% financing on their home, they did an 80/20 split which involved this loan. Allowed them to avoid Private Mortgage Insurance.
Home – HOA dues $66
Mortgages and HOA Fees Total $1,894.29
Rental Property
1st Mortgage $370.20  Current balance is just under $32,000. Estimated value is $50,000.
Home Eq. Loc $110 Incurred this debt around 7 years ago (when this was still their primary residence) to pay off other debts.
HOA $219 I’ve never seen an HOA fee this high. According to Chase, it doesn’t cover anything (utilities, internet, trash, etc). What could this HOA possibly be doing to warrant $219 per month in fees?
Rental Property Total $699.20 Rental income average is just under $500, which means Chase and Beth lose around $200 per month on the property.
Monthly Bills Most of the numbers below are averages based on 7 months of data, rather than Chase’s budgeted amounts.
Water $97
Cell Phones $166 Covers three phones and a tablet; there are three users in the household.
Pet Insurance $40.35
Internet $95.43 Covers internet and land line.
DirecTV $91.85 Under contract for six more months.
Car Payment $395.04
Natural Gas $50 Estimate based on 7 month average.
Storage Unit $85 Will be dropping this soon.
Electricity $90
Credit Card 1 Interest & Fees $40
Credit Card 2 Interest & Fees $30
Credit Card 3 Interest & Fees $6
Bank Fees $2
Gym Membership $100* Financed by gym at 0% for a year in order to get second year free at gym. I should probably have included this in the debt table.
Monthly Bills Total $1,288.67
Dentist $300 Covers outstanding balances on braces and restorative dental work. Financed by dentist/orthodontist at 0%, this may also belong in the debt table.
Dentist Total $300
Everyday Expenses Most of these are averages; there’s no real consistency in the budgeted amounts of Chase’s categories.
Groceries $450
Her Spending Money $125
Household Goods $100
Restaurants $526.45
Pets $216.57 Three dogs. Only one of them is covered by pet insurance listed above.
Fuel and Car Washes $223.62
Work Gatherings $72 Dinners and drinks with co-workers. Separated from ‘Restaurants’ because Chase just likes to know. Average. Max: $173, Min: $30
Clothing $50
Entertainment $50
Online Subscriptions $35
Haircuts $28
Mary $138 What is this? Daughter? Max: $592, Min: -$10
Other Medical $0 Nothing budgeted, and no category balance.
Everyday Expenses Total $1,964.64
College Expenses
Tuition $375 Covering 18 year-old daughter’s tuition at local community college nursing program. $4,500 per year.
Misc $50 Only one $86 outflow in the last seven months, but with school just starting I imagine there will be more here.
Books $0
College Total $425
Investments Planning to stop the lending club and Scottrade invesements to increase 401k contributions.
Betterment $81
Lending Club $128
Scottrade $82
Investments Total $291
Infrequent Expenses Again, I used averages here because there doesn’t seem to be much relationship between budgeted amounts and actual spending.
Vehicle Registration $28
Car Insurance $70
Taxes $13
Christmas $70
Car Repairs $20
Home Maintenance $231
Birthdays & Gifts $129
Technology $10
Reimbursable Expenses $74 I see lots of reimbursable expenses, but very few reimbursements. Forgetting to turn in receipts? Or are reimbursements included in take-home paycheck numbers?
Just Because $85 Average. Max: $297, Min: $0
Stuff I’m Forgetting About $2 Average. Doesn’t budget anything to the category.
Infrequent Expenses Total $732
Vacation Nothing currently budgeted, but total spending on vacation this year is $8,911.04 (this is the source of new credit card debt).
Vacation Total
Budget Total $7,594.80

Outflows average $7,595; inflows average a little over $8,500. Chase and Beth are working with a surplus of $900 per month, and that doesn’t include the $35,000 work bonus Chase is expecting February.

In other words, the debt elimination story here is…boring:

Chase’s work bonus is in the $30,000 to $40,000 range annually. If he and Beth continued running their current surplus and and applied most of their next two bonuses to debt, they’d have the credit cards, the car, and both equity lines of credit paid off easily in two years.

But that might be a pretty big if, given Chase and Beth’s budgeting and spending patterns.

Chase and Beth –

Although your current spending doesn’t exceed your income, you have a history of living beyond your means and using windfalls to keep the total debt balances down (but not at $0). You seem to say “yes” to basically everything.

Upgraded cable TV? Yes.

$600 per month at restaurants? Yes.

More mobile devices with data plans than people living in your home (AND a land line)? Yes.

Vacations? Yes.

Financing a car? Yes.

Lots of pets and pet insurance? Yes.

Braces and cosmetic dental work? Yes and yes.

Help daughter with school? Yes.

Plenty of personal spending money? Yes.

The sum of all those yeses is an enormously inefficient and unfocused budget. I counted around 60 categories, and looking through the transaction history and monthly budgets, there’s almost no relationship between budgeted amount and actual spending. In other words, you’re using YNAB for expense tracking, not budgeting.

Where do you go from here? Back to basics. You already have a $900 monthly surplus. Use your YNAB spending reports to set realistic category amounts going forward by subtracting a good percentage from your historical average. Use the YNAB mobile apps on those internet-connected devices to check the budget before you spend. Talk to each other more about your goals and help each other stay on track with spending. Need more motivation? Just look at your retirement account balances (which are low, given my estimate of your age).

You need to get out of debt and apply all that extra money to your investments. Commit to being finished with borrowing, and use your high earning power to get ahead fast.

31 Responses to “What happens when a family says “yes” to pretty much everything? A mushy budget and credit card debt.”

  1. Susan C.

    Take out an “equity” mortgage to get 100% financing?? That means the mortgage company allowed them to hedge their bets that the “equity” in the home would automatically increase as soon as they walked through the door? That is one big reason we have had the problems since 2008. Bonuses of 30-40 grand/year. I live on way less than that. There is no excuse for this family to even have had that credit card debt, “equity” mortgages (let’s get back to basics and call them what they used to be “first and second mortgages”) and for the wife to be working as she is. She can get some decent skills and get a better paying job. Or just live on what they earn with one income. Seems to be enough for me. Want to save another $100/month. Get rid of the Direct TV (I’d bet the buy out fee would be less than the six month contract left) and even ditch the entire TV. Walk the dogs, cook more at home, and enjoy the added free time you now have without that TV in the home.

  2. Maquis

    I’m honestly more concerned about the “no” answers I’m seeing here. Budgeting for upcoming medical expenses, budgeting for repairs needed on the rental house (or the main house, to some degree), etc., are all “no”.

    The budget for clothing is reasonable, but given the spending elsewhere, I’m guessing that it is not being followed.

    Why is the rental house being held onto? If its losing 200$/month, that’s 2400$/year just being thrown away. There’s no guarantee that the value will go up, and actually, unless you have an extremely good renter, it probably isn’t going up. I’d honestly recommend cutting your losses and selling that.

    • Julie Hart Davis

      I wonder if the rental home is a vacation home? If so, then the $200/month they lose should actually be in the vacation category. If it is not a vacation home, then I would agree 100% that they need to sell!

      • mark

        It’s not a vacation home, and I agree with Maquis. I know they were holding on to it during the terrible real estate market to avoid a big loss on the sale, but now the market has turned. I think they ought to dump the property – and a huge chunk of their debt with it.

  3. Minda

    Wow that’s messy. 60 categories would be awfully hard to manage. I’d probably fresh start and trim down the categories if I were them. Merge some and delete others. I think you have it right about using YNAB to budget instead of track expenses. Good luck Case and Beth. Don’t get discouraged having a real budget will help you focus your money on the things that matter to you most.

  4. Terry

    With that kind of money flying in and out, what this family needs is an honest to goodness GOAL.

    You need a fire under your butt, because this amount of income and future cash prize coming in each year is keeping you in a numb coma, and retail therapy is keeping you dosed each week.

    As a fellow software developer, I think you should sit down with a spreadsheet and figure out what your extra income would be each month if all of your debts were paid off.

    I’m seeing it’s almost $2000 in bad debt, about $1828 in mortgages, and a possible average of $2900 in bonuses. Trim $280 more somewhere and we’re talking about $7,000/month.
    I bet you could dream something big with that.

    • mark

      Wow – I hadn’t added it up like that. That’s some serious get-ahead money.

  5. Gina

    I’m in IT and have worked for some large companies in the past where I was “eligible” for performance bonuses of $30K and more… What I have learned in 20+ years of “bonus world” is that you should NEVER count on bonuses. Even if you’ve received one every year you have worked there; policies changes; leadership changes, performance changes and that bonus can come off the table. One company I worked for purchased another company with a different compensation model. The result was that our base pay was increased by ~5% but bonus potential was cut by 20%.

    In another situation, my bonus was cut by 50% because my manager knew I was going to be laid off within the next 3-6 months; I had met my targets but I was unwilling to move to a new city. So I while bonuses have benefited me in helping me eliminate my debt – I do not count on them.

    • MrMcLargeHuge

      I’d like to know too. I was very confused by that line.

      • mark

        I hadn’t ever heard of it either. Apparently this gym offers to finance the full $1,000 on a 12 months same as cash deal if you agree to a two year contract. I imagine the interest rate after the 12 months is pretty gruesome. Chase has been making $100 payments to get rid of the balance on time.

      • No Waste

        This is one of the worst financial arrangements I’ve ever seen.

        Second only to payday loans.

        I might be exaggerating.

  6. Heather

    I would LOVE if if a future article could address this: “. . . there’s almost no relationship between budgeted amount and actual spending. In other words, you’re using YNAB for expense tracking, not budgeting.” I think this is a critical difference and parsing it out in a post would be really helpful for some of us, myself definitely included. Thanks!

      • Karen

        Yep, that line stood out the most for me as well. That’s exactly what we’ve been doing. :/

      • mark

        I just remembered someone submitted a budget who described themselves as just having transitioned from “expense tracking” to “budgeting.” It may take me a couple days, but telling that family’s story might be the best way to cover the concept.

      • Jenifer

        When working with budget-resistant people, I introduce the process as “expense tracking.” Once we get a sense of their “lifestyle” — then we create categories for each aspect of their lifestyle and design a budget (that usually matches the actual expenses for a bit).

        And then, we identify their goals — debt reduction, buffer, investment/savings. Then create a budget that doesn’t feel like a sacrifice.

        Once they get addicted to debt reduction/buffer/investment-savings, *then* they tighten up their budget into a more frugal one.

      • Brenna

        I think I fall into this category as well. Even when I do budget, I frequently use the last three month’s expenses averaged as my budget number, rather than really taking a look at what I SHOULD be spending in said category.

    • Joni

      Great idea for a post; I look forward to reading it and the comments that follow.

      Since I made the move to YNAB, I have used Mint for “tracking” and YNAB for budgeting. Works well for me, since I can see everything at once in Mint, use Mint to add transactions to YNAB, never have to reconcile YNAB with my accounts, and only login to my accounts if the balances don’t match.

      The distinction between tracking and budgeting is the crux of YNAB, and what makes it work.

      • Heather

        Yes, I’ve also kept my Mint account but I realized that I rarely sign into it anymore, so now I’m wondering if I’m truly budgeting or just tracking expenses with YNAB. Hmm.

      • Mikhaela Reid

        I’ve been doing the same thing and it works really well for me! I don’t worry too much about categorizing in Mint anymore, but it helps me make sure I haven’t missed any transactions.

    • Paige Burkes

      I completely agree. As an accountant, I’m anal about tracking everything. For many years my husband and I have created budgets that we end up ignoring. This has landed us in gobs of debt and trouble, especially after being laid off when our employers were sold – more than once.

      After recently reading about the Four Rules, I noticed something subtle the other day. I looked at a long grocery list and wondered how much I needed to cut it before going to the store. I noticed that, when I logged into Quicken, I looked at my bank balance to see if I had “enough” instead of looking at my weekly grocery budget. Caught! I hadn’t even realized that I had been doing this all along.

      Making the shift from checking my bank balance (even when I forecast it out 90 days to avoid surprises) to checking what’s left in my weekly budget made me realize how much bigger that ending balance will be at the end of each month.

      I realized that I have been managing my spending to stay just above zero instead of staying within budget. No wonder I’ve been feeling like there’s “never enough.”

      Thank you so much for helping me to see the difference, Mark! You just changed our financial future.

  7. Dona

    I’d like to understand better why there are too many categories. I have a family of four and a dog (only one mortgage), so the expenses are varied and wide for us. I keep a lot of categories so I can budget better, and it has taken me four months and I am still learning and applying the YNAB rules.

    • MrMcLargeHuge

      There’s no set number of categories that’s good or bad. Most people get bogged down with too many, so typically, the fewer the better. But some like to be very granular. I have 60 categories as well, and I don’t find it cumbersome or overly detailed in any way.

      • mark

        Right – lots of categories isn’t automatically “bad” – it’s just a potential warning sign of a budget that’s granular to the point of being less useful.

        Quoting Jesse (YNAB’s founder) from his post on his ideal budget:

        “More categories isn’t bad, to the extent that you gain awareness that drives decisions from your extra granularity. I’m noticing some spots where I gain no awareness.”

  8. Nate

    Hello Mark,

    How can I get in touch with you to review somethings on my budget? I have a few questions that I think you would be able to anwer

    • mark

      By all means, Nate. I’d look forward to it. Just send me an email (mark@youneedabudget…)

      • Matthew Weirath

        It is funny, I have really been thinking about emailing you. I have been seeing all these debt posts, but what about once you don’t have anymore debt. I have been trying to focus on the future, but debt is a lot more concrete and an easier target to focus on. Putting money down for a house (when we aren’t sure if/when we are going to buy) or for a retirement is a lot harder. Have you thought about doing a post, about post-debt?

      • mark

        Hi Matthew – I’d love to write a post about how you’re thinking through your priorities and goals now that you have no debt. Email me!

  9. Jessica G

    Wow. I see areas to be cut, lower the cable/dish package, cell phone plan. The basic easy to reduce and save some money but then there is all these large categories that could but cut and/or lowered. I agree with the selling the rental house. I would trim the budget as much as possible to have the largest snowball possible to get rid of this debt asap.

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