Fortunately, my first thought was wrong. Let me introduce you to “Beth” and her husband, “Stu.”
Beth and Stu are a married couple in their 30s with two young children. They live in a small town in a totally-paid-off home (woohoo!). Stu works (I think) at a hospital full-time (and overtime as much he can), with Beth staying home with the kids and supplementing their primary income with her day care business.
A while back Beth and Stu suffered a business failure; they’d started a restaurant and worked “side by side, seven days a week, twelve hour days.” They loved working together, loved the idea of owning their own business, and were crushed to have the business fail, leaving them with tens of thousands of dollars in unsecured debts.
Beth and Stu seem to have dusted themselves off and attacked the debt without – as far as I can tell – any self pity.
While my first thought (based on their balances and income) was that bankruptcy might be their only way out, my email correspondence with Beth tells me this couple is solidly on the path to debt freedom in the near future.
Let’s break this down by income, then debts, then budget:
|Stu||$2,200||Includes an average of his overtime pay.|
|Beth||$400||~$90/week, although Beth hopes to double or triple her income this fall.|
Note on income: Beth has built their budget on a 4-week month, which means it doesn’t account for a couple paychecks per year, nor does it include the odd side job she does for extra money. All extra paychecks and side income go toward their debt snowball.
It’s worth noting that Beth and Stu are fully buffered, and are not increasing their debt.
|Loan from Bank A||$10,189.03||13.75%||$438.31|
|Loan from Bank B||$8,753.89||0%||$90|
|Line of Credit||$8,926.24||7%||$200|
Beth and Stu’s monthly debt service totals almost 33% of their gross income (give or take) – which means their debt to income ratio is lower than mine and I’m sure many others’. This is the part where we all congratulate Beth and Stu for paying off their house and having no car payments (applause). If not for their discipline in those areas, I think they might be headed for bankruptcy. It also means they’ll feel rich when the debts are gone.
|Water, Sewer, Trash||$50|
|Cell Phone||$40||Beth and Stu use Ting.|
|Landline||$15||Necessary for the day care business.|
|Health & Beauty||$30|
|Clothes||$10||“Mostly Goodwill and hand-me-downs.”|
|Gym||$5.35||Cheap thanks to Stu’s job.|
|Sam’s Club Membership||$3.33|
|School Uniforms||$10||Kids attend private school, but pay no tuition thanks to a state program.|
|Business Insurance Rider||$12.37||Necessary for day care business.|
|Bank Loan A||$438.31|
|Bank Loan B||$90|
|Line of Credit||$200|
I have only three things to say about this budget:
1. “Beth” and “Stu”: Great job. You’re paying off a big pile of debt while taking care of your kids and each other. You’ve told me you expect to be debt free roughly two years from now (thanks to the snowball and about $6,000 per year in tax credits). Once the debt is gone, I’m guessing you’ll funnel most or all of your snowball into retirement savings (that’s what I’d hope to see, anyway).
2. I don’t think I’d be setting aside $200 per month for a replacement vehicle while paying 13.75% on another loan, but I’d be curious to hear the community’s take.
3. You’ve also told me the job and income prospects aren’t amazing in your area. It seems like it will be tough to exceed ~$35,000/year on your current path. You two do great with your current income, but I wonder wonder what would happen if Stu’s income were at or above the US median? You two could do some serious (good) damage if you had those extra funds.
That’s all I have. Thanks for sharing a great example of conscientious budgeting on a limited income!