Martin Luther said, “Even if I knew that tomorrow the world would go to pieces, I would still plant my apple tree.”

Are today’s and tomorrow’s economies going to pieces, how can you be faithful to your future?

Set up a budget.

Start by tracking your expenses and income sources. Along with this, give yourself goals to determine where you want your money to go. Assign each dollar a category and track for one month the actual results.

When you track your spending habits it gives emotional connection when the money is spent. After some time you will realize what categories you have under control and which ones need some work and discipline.

Next divide your expenses into fixed vs. flexible categories and create a minimum living column (i.e. if a spouse lost a job).This should list the minimum payments on monthly debt, also including forgoing optional spending routines like haircuts, date nights, and restaurants.

Then list your normal maximum living expenses with all the normal payments and optional luxury categories.

When I first got married we went through two periods where we had two sets of loans and expenses but only one income source.

First when we were married my wife did not have a job and we had to draw on personal savings to offset the lack of income.

Later when my wife who is a teacher was unsure of her rehiring we had to anticipate a layoff by living minimally.

It is amazing how little we could live on and how wonderfully we are blessed through the ups and downs financially. Budgeting definitely prepared us and made it possible to live minimally.

Now we readjusted our budget yet again to look at how we can capture extra money from our budget to accelerate our debt payoff. First we shifted our thinking into breaking down when our bills and debts are paid to either the first half of the month or the last half of the month.

We then synchronized this with our automatic withdrawals going towards our emergency fund or savings. This planning allows us to coordinate when everything is paid without overdrawing from our checking account.

Just this last week we decided to adjust the budget, living minimally with a maximum income source, with the purpose of throwing all the extra money towards debt.

It’s exciting to think that in the next months we will be contributing a little less towards savings, cutting back on our wasteful spending and dramatically reducing our debt.

The power of $180 extracted from the budget plus the $100 extra going towards debt already, gives us a real force, $380, to crush our debt and give it no power over us.

Have you assigned every dollar with a name?

Do you have a plan to live minimally if necessary?

How much can you come up with to fight off debt that you did not know you had?

I came up with $180/month. Can you beat me?

This series will somewhat mirror Dave Ramsey’s “baby steps” outlining what is necessary to be free from debt and to live richly.

I read Dave Ramsey’s “Total Money Makeover” when my dad gave it to me as I was exiting college and thinking of applying for my first credit card. Needless to say, I eventually got the credit card, but Ramsey’s book made me take a second look at the traditional ways of going about purchasing big items such as a vehicle or house, and set my fiscal mind on the right path.

I say free from debt and live richly because it is relative to everyone in their own lives. You may not be 100% debt-free, say your house is still being paid off or your student loans still have payments due for another 15 years but if your consumer debt is zero you can do some really awesome things.

Also you may never be rich by the world’s standards but if you live “richly” you may have financial independence, and may be giving back to your community or church, giving is powerful and comes back to you ten times over.

The 8 Ways to be free from debt and live richly

1. Set up a budget
2. Start an emergency fund
3. Set up a debt reduction chart
4. Complete a larger emergency fund
5. Take money from debt payoff towards retirement
6. Fund children’s college and replace vehicles and furniture
7. Pay off mortgage earlier than expected
8. Give back to church and community

The reason I chose 8 steps is the number 8 represents a new beginning, a new week begins on the 8th day, it’s the number of grace.

As we look at these steps they are to be looked at with a circle in mind. Going back through the steps will reinforce new habits, show you things that have slipped through and give you encouragement along the way.

When I started this blog I decided I wanted to focus on 3 main ideas:

1. Budgeting Money- The horizontal time line of money
2. Reducing Debt- The downhill slope of money
3. Building Wealth- The uphill climb of money

The foundation is laid when you outline where your money is coming from (income) and where your money is going (expenses). Creating a monthly graph showing the change over time between the two categories will track your financial behaviors for the month

This data will show you if you are living within your means, what wiggle room you have to pay down debt and/or build wealth.

Next add a line for your monthly debt payments. Only include car, student, consumer debt and mortgage payments on this line. The goal is for this line to go to zero over time.

The next line to add is the amount of money you are saving or investing each month. Do not include the total accumulated but the monthly contributions made.

The last two lines are just fillers for your chart. A monthly passive investment income line will motivate you showing you the progress you are making to financial independence. The moment this passive income line crosses over the expense line you are financially free.

The last line is just as important. The charitable contribution line tracks the monthly progress you are making to give back to God for all he has given you. Shoot for 10% but don’t be surprised if you start out slow and end up accelerating past 10%.

Here are the ups and downs my wife and I have experienced thus far:

This basically shows if we are living within our means, it looks like we had some big swings, but the normal months show that the outflow equaled the inflow.

I just charted this in about 10 minutes by taking the last 16 months bank statements and recording the deposits (roughly our income) and the subtractions (essentially our expenses).

In the months ahead I will start a separate chart based on giving and saving since these amounts would seem like outliers on the bigger chart. Get your calculator out and start graphing to get a handle on your personal finance foundation.

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I just came up with $530 extra in my budget. I found the money because I was trying to justify owning a house. The $530 would have been the difference between owning and renting. This was realized after all the extra fees associated with owning were concluded.

Now that I found the money in my budget I want to do something really cool with it. First I want to save it, then invest it my future.

Saving the money first will establish my family with a great emergency fund. At $530 over 12 months I’ll be sitting on $6360. With a yearly savings of $6360, I can do many things with this cash.

1. Emergency Fund- Replaces 2 months expenses (long-term goal being 6 months)
2. Pay off Debt- One car could be paid off
3. Use as down payment- Reevaluate buying house after one year
4. Begin Gap Bridging- Develop taxable investment income for retirement (more on Gap Bridging later)

The hard part with this savings plan is disciplining myself to actually find and save that $530 extra every month. I’m already putting 100/month into an emergency fund automatically via bank transfer. One of our debts is a month or two from being paid off, so we will roll that over into our next smallest debt.

So I can do two things. I can establish a buffer zone in my checking account so I don’t overdraw and put the $530 on autopilot, trying to remove that money from my spending accounts. Or I can find the extra money throughout the month and deliberately set it aside into the money market account. Once some irregular one-time bills are paid I can find the buffer zone and put this savings plan into action and adjust my spending behavior accordingly.

Finding extra cash in your budget can essentially make your free financially? If your expenses are well below your income you can do some really awesome things with your money. Go over all your expenses, break down how much you need in checking to pay your bills at given times of the month,set the savings on automatic, and live within your budget.

What extra cash can you find in your budget today?

What would you do with it?

What would you do with my $530 extra/month?

What am I even talking about you’re thinking. Well I’m talking about home ownership.

With the 1st time home-buyers credit expiration closing in on us, people around me were suggesting to my wife and I that we should consider purchasing a house. A wonderful realtor friend of ours even suggested a house for sale in about the same area we live in now.

On paper the house seems like an idea fit to our needs, wants and budget. But I wanted to dig deeper. I stumbled upon a blog article recently written on the very subject I’m about to write about check it out @DebtFreeAdventure.

Here are the facts in the rent or own dilemma we found ourselves in.

Renting Facts Monthly

940 sq-ft 2/2 house

rent- 825

renter’s insurance 15

Total 840

Home Purchase Variables

1650 sq-ft 4/2 house w/pool

Listed Price (short sale)- 179,000

I would offer 159,000

Down Payment 8000 (basically the tax credit)

Interest Rate 5.25%

Assume a 160,000 mortgage (hypothetical sale for 168,000)

Monthly Costs of Homeownership

Principal and Interest- 890<—–already over what we are renting for

Property Taxes- 150

Private Mortgage Ins.- 80

Homeowner’s Ins.- 40

Homeowner’s Assoc.- 30

Fixed Expense Subtotal- 1190

True Cost of Homeownership

Increased Water Bill for Pool- 25

Increased Electric Bill (44% more house to cool) – 65

Year Round Self Pool Cleaning- 90

True Cost Subtotal- 180

Grand Total to Truly Own- 1370

So I could buy the house, my income allows it, but I would be tapped out financially if I did. I would take a budget that has tons of wiggle room for miscellaneous things or being a wealth-building machine, to an American who is barely making ends meet.

Concerning the title to this post, many of you may be confused as to whom the subject is. You own the house, so logically you are the owner and the house is the slave. I would conclude that the slave is YOU, and the owner is the house. How much would I have own of this house if I were to consider the equity earned (principal paid off)v. the interest paid during just the first year of the home-ownership. Using Bankrate’s mortgage amortization table, I made some conclusions of my own:

Taking the median amounts of the principal and interest per month that first year it was astonishing to find out who really owns who

Beginning of year one

Payment- 883.53

Principal- 183.53

Interest- 700

End of year one

Payment- 883.53

Principal- 193.40

Interest- 690.13

Totals

Principal- 188*12= 2256

Interest-695*12= 8340

Total- 10596

% to Principal- 21.3

% to Interest- 78.7

I won’t break it down further like this but you start owning more of your house than the house owns you at the beginning of year 17

And remember this is only the money you are using for Principal + Interest. I like having a maid knowing I can leave anytime, I also like being a maid, knowing I’m making some money by investing my money elsewhere in a market that gives me positive returns before 17 years.

Next up:

What to do with that saving difference I keep as a renter and how I’m gonna use it to buy a house with cash!

Angles, aspects, different viewpoints of looking at your financial life. This type of analysis will:

1. Inform
2. Educate
3. Question
4. Progress

First, when you sit down with your finances, whether you are prepared or not, you will be informed on your current financial life. It depends on how much information you are willing to gather and dig through. You can put together different reports to tell you different information about your money life.

Second, you hopefully will learn something about your financial state when you are informed. Education is essential to change of behavior. When you are informed that your spending is out of control on a certain category you can begin to learn how to stop that great expenditure and do something productive, like pay down debt or save some money for a rainy day.

Third, you will need to question why you spend $300/month dining out for example, while your receive finance charges on your credit cards of $75/month that you pay the minimum payment on. Ask yourself why you do some things this way and handle other categories in a different manner. Push yourself to always question why you’re saving or spending money in a certain way.

Last, Learn to move forward not dwelling on past financial mistakes and setbacks. Spend time setting goals on how to fix certain aspects of your financial life. Usually it’s better change one variable at a time, to see the effects more clearly and track the progress made. When you are focused, you will also gain confidence in your ability to handle your finances.

Here are some angles on my financial protractor that are useful for financial state analysis:

• Income statement (Income/Expenses)
• Balance sheet (Assets/Liabilities), often called a Net Worth Statement
• Monthly budget with Allocated/Actual spent difference, this is the traditional painstaking budget
• Bi-weekly budget, used to split up income/bills based on when they happen in the month, predicts “goal” account balances
• Simple list of fixed monthly expenses and money envelope allocation
• Debt reduction amortization tables, use to set up a plan to pay off debt or save for big purchases
• Retirement Account Calculator, use for each retirement account, exciting to look at future values
• Cash expense money envelopes

Homework:

Get some envelopes, take out some cash from the bank, and make expense categories that you would like to pay cash for from now on. When the money is gone, it’s gone for that time, period. I suggest every payday.

Financial freedom comes only after securing it through creating a buffer between yourself and unexpected financial emergencies. For some this could mean having a fully funded emergency fund, say 6 months living expenses.

But for others this may mean covering monthly expenses with passive monthly income streams either now or in retirement. Let shoot for the NOW! Once you have financial security you have the freedom be your own boss, set your own hours, and be free from the rat race. You can have fun!

Freeing your security means using your security as a base to jump off and live your freedoms out. Set goals for what you want to do with your freedom. This could be more vacations, more exciting adventures, exploring new hobbies, or starting a charitable foundation.

I was up late last night working on the blog (and taxes), when I got up the next morning my wife had left a few notes on the desk, next to my ideas. First what I had been brainstorming,

• Freedom
• Buffer Zone
• Security

She outlined some of her thoughts,

• Fun!
• Jeep!
• House!
• Vacation!
• “numbers, numbers, numbers… Yikes!”

The “numbers” concerns was probably because I was preparing our taxes last night, adding and subtracting deductions and credits.

I know my wife wants freedom too, so we’ve established a long term budget for our goals. This is our rough goal chart for the next 5 years. We’ve been married 7 months, so developing a life-plan and goals are very important and motivating!

1. Establish $1000 emergency fund
2. Pay off all credit card debt
3. Take Vacation (Second honeymoon)
4. Pay off car loans
5. Save for a down payment for a first house
6. Get her a jeep over a truck for me (I lost a bet)
7. Pay off remainder of student loans
8. Finally get a truck
9. Start own family business- Ice cream bar or sandwich shop

I know I’m leaving out details that may change out plans and goals, but this is what we have so far on paper. When thinking of your dreams of freedom, get the ideas down on paper.

You will have to free up some of that security, taking risks and some of your capital to get things going, especially starting a business. If you’ve established the habit of budgeting the time and monies of your life you won’t have to worry about losing your security.

For some buying a house means security, but for others it means risk, putting lots of resources in one thing. Right now renting is more secure for us then buying a house. We lose on equity, but we have security that if there is a money crunch we can quickly reduce the biggest monthly expense in our life.

Set a list of goals based around your values in life. Set a deadline for each goal to be completed and reevaluate your progress every now and then.

How are you freeing your security today?

or how will you in the future?

Homework:

1. Make a list of your top 3 values in life
2. List 5 goals under at least 1 value
3. Set a deadline for each goal, no matter how far away it is
4. Breakdown the specifics of the first goal, stepping stones are helpful
5. Reevaluate

Seeing your money from as many angles as possible creates clarity, great understanding and financial awareness.

This is why I recommend setting up your budget in many budget templates or just jotting down your money health spontaneously. You will be surprised when you see your money laid out for your brain to see in different ways. Currently this is the way I lay out my budget.

1. Bi-weekly layout

2. Income flows and outflows of expenses

• Paychecks split up over 1st-15th or 16th-31st
• Predictable bills and debt obligations split up based on when they are due or paid, again, 1st-15th or 16th-31st

3. Giving and savings transfers are initiated. (Do it automatically for savings through your financial institution)

4. Money envelopes are used, bi-weekly withdrawals (CASH MONEY)

A. Necessary living expenses (CASH MONEY)

1. Groceries
2. Cleaning/Laundry
3. Toiletries/Cosmetics
4. Hair Care
5. Clothing

B. Necessary non-predictable replacement funds (CASH MONEY works well here)

1. Car Repairs/Tires
2. License/Registration
3. Homeowner’s/Renter’s Insurance

C. Necessary sporadic budgeted expenses (Budgeted but not CASH envelopes at this time)

1. Doctor’s Visits
2. Medicine
3. Pet Needs
4. Stamps

D. Non- Necessity budgeted expenses (CASH MONEY is very rewarding here)

1. Restaurants/Dining out
2. BLOW Money
3. Entertainment
4. Furniture Replacement
5. Vacation/Travel
6. Gifts

WHAT’S THE POINT?

By developing this type of budget, you will begin to forecast what your balance should be after your  income and expenses are computed. You can then see what your goal account balance should be at on say the 1st, 16th, and 1st again. If your balance is growing this means you can take some of your money “off the table” and put it into savings or pay off more debt.

Once this is established and made habit, then you can tweak your budget into a “zero-based” budget. A “zero-based” budget spends every dollar on paper whether it be for savings, expenses, giving, or paying down debt. This makes your balance zero every time period, thus utilizing every dollar, giving it a name.

How do you budget?

DO you budget?

Your thoughts or budgeting techniques?