You’ll have ups and downs with debt repayment, and you now have a plan that will help you get back on track. That being said, while you’re pumped to get started repaying your debt right now – life will happen.
We’re wrapping up our debt demolition series this week by focusing on how your debt repayment fits into the big picture – your ongoing financial life. If you’re just joining us now, you can find start the series here in Part One. You’ll have ups and downs with debt repayment, and you now have a plan that will help you get back on track. That being said, while you’re pumped to get started repaying your debt right now – life will happen.
Your goals are going to change. You could get married, have kids, adopt a dog, buy a house, or decide to change jobs. Through it all, your debt will still be there. It’s important to prepare for how debt repayment will fit into your changing day-to-day. This will help you prevent any lapse in your aggressive repayment strategy. More importantly, it will help you confidently make smart choices about your money during the big moments of your life.
INCORPORATING YOUR SPOUSE INTO YOUR FINANCES
Maybe the wedding’s already happened – or maybe it’s in your near future. Either way, having the “money talk” with your spouse is something that should come way before you say, “I do.” Unfortunately, that’s not always the case. The best thing you can do is tackle the conversation head-on and to be honest with one another about your spending habits, financial goals and backgrounds, and (yes) your debt.
So, set aside some time, grab a glass of wine (just one, this conversation shouldn’t happen after four), and have a conversation about each of your experiences: where you’ve been, how you got to where you are, what your plan of attack looks like, and where you plan to be in five years.
It’s important to remember that your debt is only a small portion of the “marrying” of finances between spouses. However, it’s often the most uncomfortable to discuss. Your best bet is to be upfront about how much debt you’re in, and the repayment strategy you’re currently implementing. Your loved one is going to be standing by you while you demolish your debt – so they deserve to know what you’re up against.
Remember: even as you discuss how your debt will impact future goals, you’re in this together. If you adjust your budget as a team rather than keeping finances separate – make sure that your debt repayment remains a priority. This will benefit both you and your spouse in the long run.
There’s no beating around the bush: kids are expensive. I can tell you firsthand, there is nothing better than being a dad. BUT, they can cost a fortune. So have a plan! Remember, having no plan … IS A PLAN (just not the right one)! Many of my clients tell me that having kids is a decision that, up until now, they’ve based solely on age or where they’re at in their career. That’s not a bad way of thinking about parenthood, but your finances should also be a factor.
It’s inevitable that your finances will change after you have your first baby (and your second, and your third, and so on). Take the time to decide ahead of time where there’s room in your budget to make up for extra costs.
You may need to trim back on spending in some areas, but the trimming back should not come from the debt pay-down budget. It should come from the discretionary spending budget (eating out, traveling, entertainment). Ensure that the funds you’re putting toward debt repayment remain a priority. If you’re making extra payments as part of your strategy, reducing should be a last resort. Staying on track and getting your family out of debt ASAP is always the right answer – even if it means making sacrifices elsewhere in your budget.
Over the course of your career, you’re bound to change jobs at least once. This might be a raise or promotion with your current company, or it may be a total career shift. Either way, if your new professional endeavor comes with a pay bump, don’t change your lifestyle to match it.
It’s fine to celebrate your new pay increase a little bit – just don’t go crazy. The tendency is for people to spend the majority of their raise. Keeping up with the Jones’s never did anyone any good. Plus, once you start down that path, it becomes difficult to escape lifestyle inflation. At NewLeaf Financial Guidance, we usually suggest that our clients stay true to their intentional spending goals through the use of a hub account – or your personal “cash flow machine.”
Instead, as you receive a raise, be sure to increase all parts of your budget (giving, saving, debt payment, AND spending), not just your spending. This will keep you on track, allow some room in your finances to reward yourself, and help you pay down debt faster.
BUYING A HOUSE
Buying a home is likely to be one of (if not THE) largest purchases you will ever make. You’ve got to be smart about this purchase because if you don’t take your time and think it through, you could damage your finances both now and in the future. If you follow my budgeting guide, I recommend keeping your total debt payments to 30% of your after-tax (take-home) income. However, when deciding if a home purchase fits into your budget, I recommend keeping your total debt payments (new mortgage + auto loans + student loans + credit card + etc) to under 20% of after-tax income. Why? Because this leaves 10% of your income to be used as additional debt payment to accelerate your debt payoff. It’s a way of ensuring that, even though you’re buying a home, you’re still able to accelerate your debt repayment across the board.
When you think you’re ready to buy a home, you’ll need to do some thinking about “wants” and “needs.” Define what it is you need far before meeting with a realtor, and define a budget based on your cash flow. Remember, your Realtor and Mortgage Broker are paid on commission. They do not have your best interest in mind 100% of the time. The more you spend, and the more you finance, the more money they make. Coincidentally, the more you spend and the more you finance, the more you put yourself at risk for debt amortization (which is not what you want!). So sit down with whoever you’re buying a house with. Make a list of what you absolutely need in a home, what would be nice to have, and what your bottom-line budget is before you get in front of anybody who’s trying to sell you a home.
As part of this process, I recommend a “live as if you own it” trial-run for 6-12 months. If you currently spend $1,000 on rent and want to buy a home with a $2,200 mortgage payment, live as if you own it by saving $1,200 per month into a savings account. You should get a pretty good idea of how homeownership fits into your current budget. If you can’t make it work, adjust your expectations and try again. The $1,200 you’ve saved will be a great start on your 20% down.
Finally, your first home doesn’t need to be, and probably shouldn’t be, your “forever home.” Do the financially responsible thing, and find a “for-now home” while you get your financial ducks in a row. Your 40-year-old, financially-independent self will thank you.
OTHER CHANGING GOALS
The temptation to “treat” yourself as time goes on will ebb and flow. Try to resist the impulse, or monitor it by allowing yourself small rewards every once and a while. Celebrating the small wins will keep you motivated to keep going, and prevent an impulsive “reward” expenditure (that blows the budget) in the future. If you completely deprive yourself, you’re more likely to make a poor financial decision that will throw you off balance – like buying a Corvette after a promotion.
It’s important to note that your goals will and should evolve with time – and that’s completely normal. Your financial goals and budget needs will be different as you get married, start a family, and continue to grow. As your goals change, evaluate whether the new “goals” (or things you want to budget for) will actually add to your overall personal fulfillment. You may have a goal to buy a beautiful home by the end of next year – but will going over budget to have the extra bedroom make you that much happier?
Organizing your finances intentionally will help you lead a happier, more fulfilling life. Decide what fills up your cup – whether that’s a trip to the family, more time outside, or more date nights with a significant other. Adjust your spending accordingly to reflect these things rather than pulling money from your allocated debt repayment budget to fund meaningless purchases or things you don’t love.
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