Tuesday, February 5, 2008

Budgeting: When Do You Change Yours?

What got me thinking about this was the skirt I wore today. Yes, this is my second post in a week which was inspired by something completely unrelated to personal finance... The story goes something like this: since last August-ish, I've been paying more attention to what I eat, and working on increasing my activity level..and I've lost about 20lbs (YAY!), and the weight is continuing to come off. Because I'm working on changing my habits, the weight loss is slower than if I went on a strict diet and began an aggressive gym program. However, [aside from 4lbs in December] I'm not gaining any of the weight back.

This is preamble to the skirt I wore today. I bought the skirt when it was snug. I like this skirt: perfect length, nice cut, pockets you don't notice. Today, I was in the bathroom at work, drying my hands, when I caught sight of my profile. I had a severe case of droopy butt (in a skirt?!!). While I knew the skirt was getting too big for me, it still looked fine from the front and I thought all was well. I was horrified when I saw my side view!

I'm including this skirt in my next Goodwill donation. Obviously, there comes a point when you're losing weight that you have to buy new clothes, and stop wearing clothes which are a little loose. I generally go thrift shopping a couple times a month and usually walk away with at least a couple things (aside from books), so I have not regularly been wearing clothes I had a year ago.

So, this got me thinking: when do you make changes? I clearly need to start paying more attention to the clothes I've had for longer than six months, to make sure they still fit me reasonably. This then prompted me to start thinking about personal finance.

When do you change how you budget?

I still have about 58% of my original debt amount left to pay off. I recently received a raise, though I haven't changed my budget because of it (note: my weekly pocket money is a static amount, not an amount based on the gross of each check).

I know that for people who have long had debt, getting to the point of eliminating it can leave them at a quandry. How do you manage having money and no debt? When you're on the road to eliminating debt, when do you adjust your budget for when you won't have debt? If you don't know how to live a cash-only life (with no debt), how will you successfully do that?

It seems that if someone spends a lot of time aggressively paying down their debt, and cutting luxuries from their life, that they can easily end up either back in debt or just plain confused, once the debt is gone. It follows, for me anyway, that as debt is getting paid down, budgeting needs to change along the way (at, say, each 25% mark). That way, the debt reducer will get accustomed to managing their money differently, and be better equipped to handle the new responsibilities of being debt-free, when that day comes along.

I'm not proposing people only adjust their spending money, but that they also adjust how they save and invest. In light of my recent raise, I've been thinking of skimming that amount and putting it into the IRA fund, and I've also considered a 30%/30%/30%/10% split between IRA, debt, savings, pocket money. I don't subscribe to the "put all raise money straight to debt/savings, because you won't miss it" school of thought, because I disagree with it. Inflation happens, lifestyle changes happen, life just happens. I also feel it's a type of punishment to not let yourself revel financially in getting paid more for your work.

Part of my goal is to get in the habit of saving more, in addition to putting extra money towards debt, instead of just summarily putting all the extra money on my debt. I figure for the minimal amount more I'll pay in interest (remember, I'm in the low-interest balance transfer cycle) will more than be made up for in compounded interest in the long-term. Yes, this will result in me having my debt for a slightly longer period of time, but right now, I'm thinking this is a price I'm willing to pay. I also reason that this will help me adjust to having more money, which will be quite useful once I finish eradicating my debt. I'm looking at the long-term goal of financial security in retirement, and allowing the shorter-term goal of achieving a debt-free life a little extra time.

This "plan" would also help me as I'm trying to save a downpayment for a condo, and instead of starting from zero when my debt is gone, I'll have some amount to use as seed money.

I know people have written about dealing with money once debt is gone, but is there anyone out there who's written or thought about how you adjust your budget before the debt is gone, after certain milestones are reached? Or are people mostly just sticking to the same budget until the debt is completely gone?

Since we've obviously had issues with budgeting our money in the past, doesn't it make sense to adjust as you go, so that you adapt to your changing debt and income levels?

1 comment:

Mr. Debtbeater said...

I've actually been really bad about not changing our budget. We just keep trying to keep our expenses within the desired amounts. Through the holidays we just let everything slide, and now I think it's time we get through an entire month with a budget to see exactly how much we need to change it. :)

I'm guessing we'll change it every month as we examine how we did the previous month.