Closing the "Should Gap": How to Live Life While Fighting with Debt

Amy’s an architect in her mid-twenties earning a little over $50,000 per year as an hourly contractor. She lives with her two cats and her favorite pastime is going out for good food and good drinks with her friends.

In fact, until recently Amy was spending upwards of $800 per month on her social life. That’s a lot of money, but it wouldn’t be such a big deal…if Amy weren’t also trying to pay off $80,000 of debt.

Amy feels guilty and embarrassed about her debt, but this budget review catches her right in the middle of positive transition. She’s going from this: “I get what I want. I wanted a degree, so I bought it. I wanted a new couch, so I bought it. I wanted to go out, and so I spent my tax money on going out and now I owe the IRS,” to this: “I want freedom from debt, and come hell or high water, I’m gonna get it.”

Take a look at Amy’s budget; then we’ll go over the rest of the story.

Monthly Bills  
Utilities$230Water, trash, electric, gas.
Gym Dues$85 
Public Radio Membership$7 
Monthly Bills Total$942 
Everyday Expenses  
Pets$120Her cats are her babies.
Fuel$180Commutes 3+ days/week, 60 mi. round trip.
Health and Wellness$65 
Fun Money$100 
Everyday Expenses Total$676 
Infrequent Expenses  
Car Taxes and Registration$30 
Car Maintenance$38 
Car Insurance$76 
Birthdays and Christmas$19 
Skin Care$35 
Supper Club$20Hasn’t been using this, considering dropping it.
Infrequent Expenses Total$218 
Back Taxes$1,260$16,000 owed to the IRS.
Student Loan 1$317$39,776 @ 6.55%
Student Loan 2$68$9,468 @ 8.25%
Student Loan 3$55$8,425 @ 6.025%
Student Loan 4$40$114 @ 5%
Credit Card 1$300$1,664 @ ~8%
Credit Card 2$38$571 @ 0%
Credit Card 3$86$171 @ 0%
Car Loan$214$3,285 @ 6.99%
Debt Total$2,378 
Budget Total$4,218“Exactly what I earn per month.”

What’s missing? Health insurance, emergency fund savings, and retirement savings. She’s committed to setting aside $100 per month for health insurance, she’ll save for retirement when the debt is gone, and…we’ll get to the emergency fund in a minute.

Alright, so here’s Amy, fighting the good fight, spending 56% of her take-home pay on her debt, and starting her snowball by paying $300 per month on Credit Card 1. She’s doing great, and on her current path she’ll be totally debt free in about five years (maybe a little less).

But after I went over Amy’s budget, it seemed like I needed to dig a little more. Why? Because she was budgeting every penny, she has no buffer or emergency fund, and her Fun Money category is 1/8 of what she told me she historically spends.

“Hey, Amy,” I asked, “How long have you been working with this budget? Long enough to know it works? Or are you still trying to get used to it?”

That’s when I found out Amy is fighting the “Should Gap”: that state of stressful limbo where a person is trying to make a positive change in her finances, but is still trying to close the gap between what she “should” be spending and what she actually is spending.

Amy told me she’s been trying to make this budget work for about four months, but in a couple of those months she had some pretty ugly overspending in her Fun Money category. While budgeting $100 per month for fun, she’d spent an average of $300 to $400. She’d covered the overspend with a small buffer she’d built up, which is now basically gone.

I pointed out to Amy that “a couple overspends” in four months means it’s happening 50% of the time, and on the current path she’s going to have to cut her spending, cut her snowball, or start using the credit cards again.

In other words, Amy’s dealing with the hard reality of changing habits and getting out of debt: it’s great to resolve to make the big snowball payment, but the money has to come from somewhere. She’s been trying to keep a foot in both worlds – spending like she’s always spent (because, although the dollar amount is lower, the excess and impact are the same) while trying to pay off the debt. Something has to give.

But…just because something has to give, doesn’t mean it has to be the thing that “should” give – I told Amy it’s okay to maintain her social life – under certain conditions. See, every budget has its sacred cows. I (and others) have taken heat for prioritizing charitable donations in spite of having debt. Donations might be easier to defend because they’re “noble” (or whatever), but it’s not about the “nobility” of the category. It’s about the values of the budgeter.

After dialoging with Amy, I can tell that socializing with her friends is what she values most. It’s what she looks forward to, what she thinks about during the day.

For Amy, closing the Should Gap doesn’t mean she has to cut out the thing she loves most. She has to acknowledge she’ll be happier and more motivated to stick with her snowball if she protects the social spending, and then make it work.

Here’s how she and I decided it could work:

She’s going to allow herself $250 per month in the Fun Money category. That’s still a cut compared to her recent history, but it’s much easier to stomach.

Allowing herself $250 for fun creates a $150 deficit. Added to the $100 she’s decided to set aside for health insurance, she’s working with a $250 total deficit.

During the course of our email correspondence, she called two of her banks and got interest reductions on some debts that freed up $50 per month. She’s committed to cutting at least another $50 from her spending, but that still leaves $150 per month she has to cover if she wants to preserve the snowball and maintain her social spending.

As Erin taught us on Wednesday: when bills exceed income, there are only two options: cut spending or increase income. Amy knows that she needs to come up with that extra $150/mo, and she accepted the challenge of creating some extra income to make it all work. She can increase her hours as a contractor, and she’s also been able to earn money selling jams, baked goods, and hand-made scarves before.

My thoughts on Amy’s budget would be very different if she weren’t already sending out 56% of her income to creditors, and if her snowball weren’t going to free her in five years.

But Amy -make no mistake: if you want to break the debt cycle, you have to prioritize the snowball ahead of the social life. Fight for both, but make sure the debt payments go out early in the month so the only thing that can suffer is the social life.

One final thought: I wonder if the Dave Ramsey enthusiasts in the audience would tell us you need to create a $1,000 mini-emergency fund as a protection against new debt. I’ll let the commenters chime in on that one.

Here’s to closing the Should Gap and spending according to our values. Hope everybody has a great weekend.