Budgeting Part 5: How do I use my extra Margin most effectively?

Welcome back. Let’s recap. You discovered your why, wrote it down, shared it with others, and stuck it where you can see it every day.  This is your motivation to go on the budgeting journey. Then you found all your sources of income and all the things you spend money on over the month.  We put that all together and categorized and sorted this to create your first budget. We know that first few months of budgeting may not be perfect, but you did see some interesting, and maybe concerning, things starting to develop. After the budget is formulated, we found ways to create more margin in it to hit those goals or “whys” sooner. This extra margin is the fuel for the budget journey – a little margin and you move a bit slower, but with more fuel you can speed like a racecar to your dreams.

Regardless of the amount of margin you found, we need to discuss what to do with it to get the maximum benefit.

1.      Do you have that $1000 started emergency fund? If not, this is where the margin goes until you have achieved that. Remember – this is not month you access unless there is a real emergency. It should be liquid but separate from your funds that run the household. We recommend a high yield savings or money market account.

2.      Did you have more than your $1000 emergency fund saved in non-retirement accounts? If yes, consider that more margin this month and see the next step.

3.      Do you have consumer (non-mortgage) debt?  If the answer is yes, you will pay minimum on all of your debts that you listed out except for the smallest debt.  You will throw everything else at the smallest debt.  If you have enough to cover more than the smallest debt, move on and put the rest on the next smallest debt.  Now that you cleared a debt, you now have that minimum payment amount in your margin next month along with the rest of the margin.  You can see how you gain momentum using this process. *** remember IRS/tax debt and legal debts move to the top of your debt list, even if they are bigger than your smallest debt. Also remember that bills in collection move to the end of the list.  Stay on this step every month until you are consumer debt free

4.      If the answer to the question do you have consumer debt is no, congrats! What do you do now?  Now, since you have done a budget a couple of times, you have a good idea of your expenses.  How much does it cost to cover your needs for the month?  Take that number and multiply it by the amount of months of an emergency fund you feel you need.  Rule of thumb – if you have a more stable job and you are not the single source of income for a whole family to rely upon, you can aim for closer to 3 months.  If you own your business, independently contract, or are the single breadwinner for the family, you may want to aim for an emergency savings of closer to 6 months of expenses.  Notice closely that I say expenses – this is often much less than income and also does not include niceties – just the basics to survive (like your budget when you were clearing debt). Add the necessary amount to that $1000 emergency fund.

5.      Once you have made it to this point, you have choices – do you own a home? If the answer is no, you can choose to stay intense and save for a downpayment.

6.      If you have a home, or this goal is not as urgent for you, start upping your retirement savings to 15% of your income.

7.      Now is also the time that you can start some savings for your child’s college fun if you choose.

8.      It is also when you can start sinking funds for upgrades in your life like a newer car, furniture, a vacation, etc.

9.      Lastly, if you do own that home, every other last dollar in your margin goes to pay extra on your home. NOTHING feels better than owning your home outright – you then owe nobody ANYTHING!

Congratulations on making it completely through why we budget, how we budget, and what we do with a budget.  Come back next week for one last budgeting blog on dispelling myths around a budget.