Living Within Your Means: The key to debt freedom & buying any Halloween costume you want

Earlier this year, Jenny and Aaron were feeling like their income was at risk. Aaron’s position at work didn’t feel stable, and they both started feeling like a transfer within the company would solidify things. Without getting into detail, I can say their feelings seem valid, and I’d probably have made the same move given the same circumstances.

They applied for a transfer across the country that would keep Aaron in the same position, but working in a more stable office with realistic opportunities for advancement he had earned through his great performance.

The challenge would be the cost of the move, which the company would not cover.

With that backstory in place, let me give you Jenny and Aaron’s debt balances at the time they were making the decision to sell their house and move:

LoanBalanceInterest Rate
Credit Card 1$1,484.0216.24%
Credit Card 2$3,600.0017.99%
Credit Card 3$4,625.0012.99%

We’re looking at a little over $20,000 in debt. I’ve left the payments out of the table for now, because what I want to tackle with today’s post is the debt balances, and the decision-making process that protected these balances when they could have been eliminated.

See, those balances are as of February 28, 2013. It happens that January and February gave Jenny and Aaron a big cash infusion:

  • January was a three-paycheck month for Aaron, who’s paid bi-weekly (giving them an extra $1,400 and change above their typical monthly income).
  • They received $6,179 in tax refunds.
  • Aaron received a $3,000 bonus at work.

Jenny and Aaron are tithe-payers, so 10% of that cash went to their church.

Alright, so what’s the approximate “score” at that point in time?

  • $9,709 in credit card balances.
  • $9,521 in cash surplus (net of tithing).

Now, keep in mind, Aaron’s normal bi-weekly paychecks are coming in, so none of this bonus cash should be necessary for day-to-day living.

Jenny, I have to talk directly to you right now, because in our conversations you felt pretty strongly that the circumstances surrounding the move to the midwest were absolutely the reason your total debt has increased this year.

I’m sorry to be so blunt, but the math is right in front of you: the tax refunds and the work bonus could have effectively zeroed the credit cards. But they didn’t, and it really didn’t have much to do with the move. In February, when the tax refund money hit the checking account, here are some of the ways you budgeted it:

Birthdays: $300
Kids’ Parties: $65
Anniversary: $180
Christmas: $310
Other Holidays: $50
Halloween Costumes: $20
Date Night: $380
Couch/Furniture: $150
Movies: $48
Wedding/Baby/Grad Gifts: $20
Aaron’s Money: $553
Restaurants: $259
Miscellaneous: $707
Vacation: $1,768
Flight Lessons: $200
Weekend Fun: $67

I point out those categories and amounts because a) none of them have anything to do with moving and b) the amounts were much higher than what you budget to those categories in any other month. In other words, you took most of the tax refund money ($5,077 out of $6,179) and put it into your normal day to day living, rather than using it to pay down debt.

In your defense, it’s not like you spent all that money in the next month. Most of those categories still have positive balances. I’m pointing out the thought process that’s keeping you in debt. Rather than attacking the debt with the extra cash, you made sure your day-to-day living was intact.

THAT is how a person stays in debt.

You’ll say you funded those categories because you wanted to avoid surprise expenses that would force you to use the credit cards again. Better to get ahead of the expenses so you can comfortably work on the debt going forward, right?

No. In order to avoid future debt, you didn’t have to front-load a bunch of your categories. You simply needed to build a budget that fit inside your income, then fight to make it work.