On Saturday evening, I had a chance to chat with my friends Wally and Jodie. You might remember them from a reader case study from last August. They're the couple that wants to get their finances in order but they're worried because they're starting with less than zero.
When we chatted in August, Wally and Jodie had over $35,000 in debt. They had variable incomes, but somehow seemed to spend exactly what they earned — about $3000 per month after taxes. Worst of all, they were behind on some payments.
Now, eight months later, their situation has improved.
Over smoked German sausage and beer, Wally and Jodie told me about their progress. (My dog, Tahlequah, was eager to take part in the conversation. Or maybe it was the sausage she wanted?)
Taking Baby Steps
“Based on your advice, we've worked hard to increase our incomes,” Jodie told me. “We've both been picking up extra shifts whenever possible. And I started a second job that pays pretty well.”
“So, you've been able to get a gap between your income and your spending?” I asked.
“You bet,” said Wally. “By working more, we don't have time to spend much money. In August, we didn't have any gap between our earning and spending. Our gap was zero. Now our gap is almost $2000! And we've been using the debt snowball method to get out of debt. We've already paid off a bunch of smaller stuff and now have $438 extra per month for debt payoffs. Plus, we have an emergency fund.”
“This all sounds amazing,” I said. “Great work!”
“It is amazing,” Wally said. “This is the best shape I've ever been in financially. But we're struggling to figure out what to do next.”
“What do you mean?” I asked.
“Well,” said Jodie. “We're getting married in September. We don't know how much to budget for that. Meanwhile, we still have a lot of debt. We owe about $10,000 on Wally's car. We had to replace my Mini Cooper last winter, and that brought us another $10,000 of debt. Plus, I still owe on my school loans.”
I did some mental math. While the couple's cash flow has improved, I was a little nervous that they hadn't actually decreased their debt since the last time we talked about money. That said, I know Jodie's old car had been a thorn in their side. And they have paid down nearly $10,000 in miscellaneous debts.
“The real issue is that we can't seem to find balance,” Wally said. “We're burned out. We've been working so much that we never have time for ourselves. Or each other. It's affecting our moods and our attitudes.”
“Yeah,” I said. “That's tough.”
Wally nodded. “Now I have a friend who wants us to fly out to his wedding,” he said. “We've done the math, and we can't afford it. He's offered to pay for the trip, but we don't know how we feel about that. We want to go, but even if we do accept his help, it'll cost us a few hundred bucks — plus whatever income we lose while we're gone.”
“What should we do?” Jodie asked. “We thought saving more would reduce the stress, but we're just as anxious as ever. Well, maybe not anxious in the same way, I guess, but still. We're worried about money — even with a $2000 gap each month.”
“Trust me,” I said. “The money worry never goes away. Everybody has money anxiety, no matter how much they earn, no matter how much they have saved.”
Worrying About Money
“Do you worry about money?” Wally asked.
“Yes, of course,” I said. “I'm basically financially independent, but I still have money anxiety. In fact, I'm so worried about it that this year I'm tracking every penny I earn and spend. And, just like you, there always seems to be something that comes up for me to spend on. There's my heart-attack scare, which now looks like it'll cost me $7500. I just paid a huge tax bill. And there's all of this travel I've committed to this year. It's always something.”
“Should we fly to my friend's wedding?” Wally asked. “I haven't seen him in a long time. I can tell it's important to him for us to be there.”
“That's a tough call,” I said. “And it's an example of how personal finance isn't just about the numbers. There are relationships and emotions to consider too.”
“From a financial perspective, I don't think you should go. But it'd be hypocritical of me to tell you that. My cousin Duane is still fighting cancer, but he wants to make another trip to Europe next month. At first, I was reluctant to join him. Like I said, I'm trying to cut expenses this year because I feel like I'm spending too much. But you know what? I'm going. So, you see, my advice and my actions are at odds here.”
I didn't know how to tell Wally and Jodie, but my biggest concern with their situation is that it seems like they're getting ready to stop the race when they've barely begun. They're not out of debt yet. They've made some excellent progress, but there's still a long way to go.
They've spent eight months on this project. From the looks of it, they have another eighteen months to go — but that's if they use the gap they've created to accelerate their debt payments. If they don't choose this route, it's going to take them even longer.
At the same time, I get where they're coming from about feeling cramped. Sure, there's a finite amount of time until they get the debt paid off, then they can loosen up. But when you're in the thick of it, eighteen months can feel like eighteen years.
The key, of course, is to find balance. And I think that's what Wally and Jodie are trying to do.
They're not trying to quit the race early. They don't want to get behind on payments like they used to be. They don't want to spend their emergency fund or to stop their debt snowball. What they want is to find a balance between today and tomorrow.
I didn't mention it to them at the time, but I think they should look at the balanced money formula from Elizabeth Warren and Amelia Tyagi's excellent All Your Worth.
Warren and Tyagi argue that in order to achieve financial balance, your after-tax spending should be allocated like this:
- At least 20% should go to Saving (which includes debt reduction).
- No more than 50% should be allocated to Needs (which includes housing, utilities, healthcare, basic food, and basic clothing).
- The rest — around 30% — should go to Wants (which is everything else).
Warren and Tyagi are adamant that less than half your budget should go to Needs. If you pour too much toward necessities, you don't have room in your budget for fun or the future.
The authors are just as insistent that you should build room into your budget for Wants. “You should ask yourself,” they write, “are you making enough room for fun?”
Wally and Jodie aren't spending much on Needs at the moment, but they're not spending much on Wants either. They've been pumping most of their money into Saving (in the form of debt reduction). This is a Good Thing. But maybe it's too much of a good thing?
Making a Plan
On Sunday morning, Wally sent me an email. After meeting with me, he and Jodie formulated a plan:
- Until their wedding in September, they'll keep their debt snowball where it is today: minimum payments plus the $438 they've freed from satisfied debts.
- They'll use an envelope-like budget for entertainment, travel, gifts, dates, and personal items.
- With the rest of their monthly gap, they'll create a dedicated savings account for their wedding. After the wedding, they'll throw this money at debt.
This seems like a good, purposeful plan to me. It balances today and tomorrow. And you can be sure that I'll follow up with them in the fall to make sure they've stuck to the plan — that they've remembered to prioritize their debt snowball again.
In the meantime, I sent Wally this Reddit post in which a young guy realized that by pushing for a 65% saving rate, he was miserable. He writes:
I'm currently shooting for a 55% saving rate and I cannot tell you how much more I enjoy life. I went from feeling like I couldn't spend a dollar that wasn't strictly budgeted, to travelling with friends, going to concerts, and enjoying the pleasures of life. That 10% made all the difference in the world
As for me, I still feel anxious. I've done a good job of controlling my small, everyday expenses this year, but the big stuff is still stressing me out. I need to heed my own advice and find better balance. That will come, I think, as I consciously make better decisions about future large expenses — and as I work to increase my own income.