Throughout the course of each month I track my ‘extra’ money. Money that doesn’t have a strict allocation like rent or food is what I consider my extra. For some people there is no such thing as extra money. These people use a zero sum budget, where you allocate every penny you bring in each month. Categories such as savings, emergency funds and investments are budgeted each month the same way groceries, gas and rent are. David Ramsey is a big fan of them!
I, as we all know, have several different jobs and my income fluctuates month to month. Doing a zero sum budget is really hard for people in my situation. It involves a lot of guesswork and I have found that inevitably I am wrong. I underestimate what I make so that I will not spend as much on the few frivolous things I allow myself and I get disheartened by the amounts that I owe on rent, insurance, gas, etc. It’s kind of the worst.
So each month after I pay all my bills I take a look at what is left in my bank account and allocate from there. It’s like a zero-sum budget at half speed. I do always ‘spend’ most of my money (I keep enough for next months rent in my checking) by dishing it out to savings or loans. I just don’t have fixed amounts for those extra dollars. Right now I’m focusing on paying off my student loans so any ‘extra’ money I have is going directly to that.
I am waiting on a paycheck this week that will entirely go towards paying off the remaining $660 balance on one of my loans. The interest rate is 5.75% and I couldn’t be more excited to wipe this bad boy out! Merry Christmas from me to me! Although it hurts my heart a little to think of what else I could do with that money, the only way to get to the point where I can keep all my income is by getting rid of my debt.
This leaves me three loans left with interest rates at 5.35%, 5% and 4.25% and a total balance of $13,291 for the new year. As I’ve written about before, I am not going to be able to keep up this extra pay schedule for the first few months of 2015. That simply makes this payment now all the more important and all the sweeter. My philosophy in finance right now is take big action when you can! I have been catering my butt off these last three months (holiday season is busy season!) and almost all of that money has gone towards my loans. When the slower season of Jan/February hits I am sure I’ll be grateful to myself that I’ve lessened my overall loan burden (My minimum monthly payment will decrease $50- not that I’m paying the minimum!) and that I made big moves when I could.
I like to fantasize about what I will do with my ‘extra’ money when I’ve finished paying my loans. Travel and retirement savings always top the list: I want responsible fun! Here’s to #Italy2016.
Kara Perez is the original founder of From Frugal To Free. She is a money expert, speaker and founder of Bravely Go, a feminist financial education company. Her work has been featured on NPR, Business Insider, Forbes, and Elite Daily.
Kara, people that receive all or part of their income based upon commission face the same problem that you do. They just don’t know what their income will be from month-to-month. I’ve a handful of salesmen friends that fir into that group and I’ve asked them how they budget. Most of them replied that they base this month’s budget on last month’s income. I followed up by asking how they planned for annual goals and the answer that I got was that they base their annual goals on last year’s commission income with any adjustment’s that they can see coming.
I’m happy to see that you have a goal for a 2016 trip now. You have plenty of time to set aside the money you will need. You mentioned savings. Do you have a set emergency savings account? Many experts will tell you that you should save towards an emergency savings goal of 3 to six months of expenses. I’ve reached the five month milestone and am on my way to six months. It’s been hard work, but the couple of times that I had to make a big repair to the car and replace the furnace in my house, I was glad I had the emergency fund to fall back on.
Hi Tim! Yes, for many different lifestyles face the same problem that I run into. Basically anyone without a set salary faces some type of difficulty in projecting costs each month. For me, basing it off last years numbers isn’t an option because I was only waiting tables this time last year and it’s a totally different income stream. I do have an emergency fund- enough for about 3 months of unemployment. I’m happy with it there while I work to reduce my debt.
Kara, I think you are doing just fine with your system. The e-fund you have will be a nice cushion for you. Keep doing what you are doing and you are going to have the bills paid off in no time.
I’m looking forward to seeing updates.
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