41. Debt Series Part 2: Budgeting + Investing

 Taylor Gilbert (00:00)
Hello everyone, welcome back to the Social Work to Wealth Podcast. Taylor here for the second episode of the Practical Ways to Pay Off Your Debt series. And if you've been waiting for these part two and part three for a while, I apologize. I realized I'm not gonna I wanna do more of these series, but I realized if I'm going to do them, I need to just record all of them and drop them at the same time.
Because I've been stressing out that it's been almost two months, well, a month and a half since the last episode. And I just I feel bad leaving you hanging, you know? That is episode thirty-six, if you haven't listened to that, practical steps to pay off your debt, where I talk about debt inventory and really doing an assessment of the debt that you have so that you can make a plan to move forward.
In this episode, I want to talk about budgeting, emergency funds, and investing while having debt. But I will start with let's talk about budgeting. And I think this word budgeting shuts a lot of people down. It can feel restrictive, like a punishment.
that you know you can't do anything fun and that is the opposite of what I want it to be for you and the opposite of the people who I really admire in the personal finance space. ⁓ the way I'm going to kind of explain it is the way that they approach it as well. And ⁓ so I hope it works for you. I would say budgets you could literally budget for anything you want. And I think historically it's been
advertised as budgets are no fun, they're restrictive. And in to be honest, a budget is just your spending plan. So you're deciding, okay, I have this money coming in. What am I going to do with it? Am I going to buy boba? Am I going to put am I going to put money aside for a plant? Do I want to put some money inside for a vacation? Am I going to put it towards extra debt? You're just deciding what you want to do with it.
I am under the belief and I do practice this in that just because I have debt, just because you have debt, doesn't mean that you shouldn't spend money on the things that you enjoy. I know there are personal finance creators out there who kind of have this rhetoric that if you have debt, you shouldn't go out to eat, you shouldn't do anything fun, you need to prioritize that until it's gone. And I just don't think that that is a healthy way to live.
We need balance, right? We know this. So, in terms of budgeting, thinking about it as kind of your cash flow system. Where is your money coming from? Where is it going? And that's it. Before I get into the nitty gritty of how to think about your budget, I do want to say, I and I think I mentioned this in the last episode that I'm not here to tell you that budget's gonna fix everything.
Because it's not it could. It could be the thing that you needed. It it kind of was the thing that I needed and some more education around how to pay off debt, but maybe you just need more income to cover your basic needs. That's not a budgeting problem. That's an income problem.
I know that a lot of people are genuinely struggling with the systems that we're living in. And so I just the point of all of this is for me to give you information.
You take what's useful for your situation and leave the rest. this is the space where knowledge is power. And so I want you to know these personal finance tips and resources because this is information that has been gatekeeped from women, from people of color, marginalized communities. And so my goal with all of this is to share what I've learned, what I'm learning, and bring it to you directly.
And so if it's useful for your situation, great.
And whatever's not, leave it and move on.
Okay, with that said, here is how I think about budgeting just in general. So you need to know your income. Start with what's coming in. Do you and if you have a variable income, I know that can be a little bit tricky to plan. So one thing that people will do that have variable incomes is planning for the minimum amount that you know you're going to get. And then anything extra you can make a you can budget it.
when it hits your bank account.
But where's this income coming in? Is it your W two, contracts? Maybe some disability income. I don't know. What all there's so many ways that you could be getting money.
So knowing your income is one of the steps in building your budget. The next one is knowing your fixed expenses. So these are things that are essentially the same every month: rent, car payment, insurance, maybe your debt payments. These are typically non-negotiables for you to, you know, continue on with your life. Third one, knowing your variable expenses. And I think this is the
Place where a lot of people don't know what's happening. There's groceries, there's eating out, subscriptions. You know, used to be rat random target runs, but we're not shopping there anymore. This stuff adds up. And I think this is where people genuinely don't know how much they're spending. So with those three kind of buckets income, fixed expenses, variable expenses, then you're subtracting.
Expenses minus income and whatever is left is your margin and that's what you have to work with for paying off your debt, saving, investing. If there's not much margin there, then ever is negative. That also tells us something important. Maybe your income needs to go up, maybe your expenses need to come down.
One thing about budgeting that I realized in my journey is that it took me a little while to find a system that worked for me. I think I was someone, I mean, I know I was someone that I started, I tried to budget and then it didn't work. And I was like, ⁓ I failed at budgeting. I don't know how to budget. I can't budget. It doesn't work for me.
But one thing I realized is I just didn't find a system that worked for me. And it took me a little while to get there. And so I just want to encourage you, if you tried a budgeting method before, maybe it was an app or a spreadsheet or whatever, you know, writing it down and it didn't work out for you, maybe there's just a different system that will work better for your brain. And it might take you some time and some trial and error to find something that works for you. So just give yourself grace while you're trying to figure that out.
One thing that I tell people, and I think has been is a helpful exercise when making your budget is going back one to three months into your bank or credit card statements to see what you've been spending. This isn't about judgment. This is about just looking to see what the actual numbers have been. because one thing that I think
happened to me when I was in the beginning of my budgeting journey, financial journey, life, is that I would just make up numbers. For example, okay, I wanna spend five hundred dollars on groceries this month and forty dollars for gas.
Two hundred dollars for eating out, et cetera. But where was I getting those numbers? I just make them up. I'm just like, yeah, five hundred dollars, that sounds good. I don't know. But I think when you go and look back at your bank and credit card statements, you can actually see, okay, how much money did I spend last month or the last three months on gas? How much money did I spend the last three months on eating out or DoorDash?
How much money do I actually spend on groceries? Because then you can take that number and make a more informed decision about what you're going to budget for that line item. So you don't want to say, okay, this month, I want us to spend $500 on groceries. But if we look back at your spending, you're spending $1,200 on groceries. Maybe we bring that down to a thousand if you're trying to cut some
of your expenses, but going from twelve hundred to five hundred, depending on what you're buying, that's gonna be a significant reduction and you might not be able to make that happen. And so we wanna make it to where you're able to meet the goals of your budget as well.
So one exer so one exercise I've done with people is literally printing off, I would say two to three months of expenses. Cause sometimes you have a month where you're like, I was off, and then I was visiting family, and then this and that, and the spending was not normal. But I feel like at least two to three months can give you a good kind of average on what you're spending and print it out or have it on your computer.
And mark highlight, go through. Okay, I'm only gonna be looking at groceries, tally all that up. What did we spend? I'm only gonna be looking at shopping, I'm only gonna be looking at eating out, etc. That can give you a really good picture of where your money is going. And even if you just do that, I think that exercise alone really can give you a good insight and make you
Maybe this is assump an assumption. This is just from what I've seen and what I experienced personally, but it helped me be more intentional with my spending. Because it was like, ⁓ my gosh, I'm spending how much on coffee? Okay. I need to I need to rein that in a little bit, you know? Not to say that you can't have coffee or all the fun things that you want, like I mentioned earlier, but just can give you a little bit of insight on where you're spending your money because I think we can kind of get in this
just rhythm where we just buy what we want, we're just spending, spending, and we're not taking a step back to look, okay, what am I actually spending my money on?
So some of ⁓ some budgeting systems or ways to organize your money, I'm gonna go through. There's the 50 30 20 method where 50% goes to your take home needs, 30% goes to your wants, 20% goes to your financial goals. There's a zero-based budget system where you are budgeting every single dollar. Every single dollar has a job, essentially.
There's also pay yourself first method. So money goes into savings or investing, and then you use the rest for your expenses. And then there's something called an envelope system. I'm sure people have seen this where people literally have physical envelopes, and on the front it says bills or groceries, gas, and you put cash in those envelopes, and then you're spending out of the envelope for that line item. And then once that money is gone out of the envelope, you have normal money
For that category.
So that's those are some ways to think about how to organize the money. I think I personally like doing the zero-based budgeting system and the envelope system, but I do the envelope system electronically. So what I like to do is I have a really simple Google Sheet. I will link it in the show notes for free. And we, you know, I put our bills in there, and then I decide.
How much money goes into what account? So my husband and I have, I would say, I believe it's about five accounts. We have a deposits account. So all of our money goes into this deposits account. And from there, I move the money into bills. And then we have those the three, I feel like main spending accounts that we have are bills, and then we have a food and other. So essentially that's just household spending.
And then him and I each have our own personal spending account. So every month or whenever I figure out whenever I decide to budget, I don't really have a specific cadence. But what I will do is the money goes into the deposits account. I budget it in the spreadsheet and figure out okay, how much money needs to go into bills this month or this paycheck, how much money needs to go into our food and miscellaneous spending account, how much money are we each getting.
For a personal spending, how much is going to savings, et cetera. And then I'd move all the money around. And then what I really like about this is I don't personally have to track my spending because I think that's one thing with budgets that can be challenging and can make it to where we don't follow through. Is when you say, okay, I'm gonna spend this month, we're spending $500 on groceries or a thousand dollars on groceries.
You then have to keep track of how much money you're spending throughout the month so that you can know how much money do you have left for that category. I hate doing that. I seriously hate doing that. Because I think it's important for you to do it at least once a week or every two weeks. Maybe you have an electronic budgeting system that will do it for you, but I just really don't like doing that. I like opening up my phone saying how much money do I have left in this category? And
deciding okay we can spend money on this. So I like that to have the bills account specifically because I just move the money in. I have all the bills on auto pay. Don't have to think about it. one thing that one of my friends did because having all these accounts is kind of overwhelming is she just has a bills account and then spending. So bills is your bills. Put it on auto pay decide when you get paid how much money needs to go into there
And then the rest of money is for groceries, gas, et cetera. But I think organizing it in that way makes it to where you're not overspending bill money. And I think that's an important important piece here.
There are so many ways to build the budget. Like I mentioned, there's a there's a budgeting spreadsheet which I will link. There's a software called Monarch. I think I have a referral code or s I'll I'll I'll look where you might be able to get a year free or something. I'll put that in the show notes. Someone recently told me about Quicken, People like that. Rocket Money, those are some online ones.
You need a budget, I think is really popular. Mint used to be a thing, but it's not one anymore. So ⁓ there's another one I really like, lunch money. It's cute name. I will link all of these in the show notes, but just try them out or open up my free sheet and just play around with it, put your numbers in and and kind of see with what you're left with at the end of the month.
Okay, next I wanna talk about emergency funds. I wanna throw this in there because I think it's worth mentioning. So emergency fund is what it sounds like. If you have an emergency, you have a fund to pull from.
Say you needed to take your dog to the emergency department or something in your car breaks, or something in your house breaks. This is where the emergency fund is for. And one thing that I think can be helpful during this debt payoff journey is building up your emergency fund just a little bit
So while you're paying off debt, if something came up and you don't have any savings, you're probably just gonna put that on your credit card, right? So having some money to where as you're going through this process, you don't have to go in get into more debt if you have an urgent emergency expense that comes up.
Generally, the recommendation for an emergency fund is three to six months of your living expenses. So you will know what your living expenses are when you make your budget. Ours is around $5,500. So our goal is to have about $15,000 in our emergency fund. Could be more, could be less, depending on the type of income that you have, the amount of people who depend on you. I know that seems like a
crazy amount of money, but that is generally in the personal finance space, what is recommended for you to have three to six months of expenses. However, when you're starting this debt payoff journey, that is a lot of money to save and not put towards debt. So it could be helpful to have about two if you were able to have about two to three thousand dollars set aside so that if something came up
you were able to pull from your emergency fund and you won't have to use your credit card and accrue more debt.
Putting your emergency fund or any type of savings in a high yield savings account is great. You can get 20 to 25 times higher interest rate. I really love Ally. I'll link them in the show notes and you can organize your money and create all these buckets and it's really amazing. So that's that.
I want to talk about lastly, should you invest while paying off debt? It depends. It really depends. I think this is one that people, some people have a strong opinion about. I think if you have a high interest debt, credit cards, personal loans, anything above about seven, eight percent mathematically, it makes more sense for you to pay that off first before investing, before investing. Because on average, and
I will we're we're gonna get into investing later, but I'm just gonna say this just broadly. The returns that you get in the stock market is about eight percent on average over a thirty year time period, essentially. So if your credit card is higher than that, but you're putting your money t in investing instead of paying off your debt, we're losing money here.
Because a lot of these credit cards is 22%, 18%. If you did the debt inventory from episode, what is it, 36%, you will know what your interest rates are and they are usually very, very high. So I think prioritizing that my caveat with that would be when we were paying off our debt, we did have some credit cards. I was still investing through my workplace because they were offering me a match. And so I wanted to get that match.
So we weren't investing a ton, but I wanted to invest up to at least get that match because that's money that's owed to me. It's not free money. It's money that is a part of my compensation and I want that.
It's kind of the nuanced answer, but I would say paying off high high interest debt aggressively is important. Taking your employer match if you have one and for lower interest debt, considering paying it paying it off while you're investing even more.
So that is what I will leave you with today.
Thank you so much for listening. Quick recap: budgeting is your spending plan, cash flow system, what's coming in, what's coming out, finding your margin, investing. Depends. Paying off the high interest debt, taking advantage of your employment if you have one, and then potentially balancing, paying off low interest debt
while also investing. And then your emergency fund to protect against your progress that you will be making on this journey.
Next episode I'm gonna get into actual payoff strategies, avalanche, snowball. I'm gonna talk a little bit about student loans. So yeah, thanks so much for listening and hope you can share it with someone who needs it.