Do you ever get frustrated by the financial progress you are NOT making? Are you annoyed when you can’t accomplish your financial goals that you want to? I have felt that way on many occasions so I am here to share some practical ways we deal with that financial frustration. I’ve learned there are some small budget tweaks that will make a big financial impact. Want to know more? Good.
Here’s the thing I want you to remember. We can all do more but something is always better than nothing. It is very easy to focus on what we are not doing. If we know we have a tight budget, we have to fight the tendency to say we can’t do anything else. Still, there is plenty we can do regardless of the size of our budget.
This is where the small changes come in. I believe there are 4 key areas where small changes make a big difference to our finances – debt, savings, house and retirement.
We have a tight monthly budget but we have found that throughout the year, we are able to set aside some extra money. Perhaps it comes from savings in a particular month or some extra income we’ve earned. Whenever we find that “extra” money, we set it aside and apply it to one of these key areas.
Here’s how we are making progress with our budget tweaks. I’d love to hear how you tweak your budget to make an impact, too!
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1. Snowball Debt Payments
Rather than tackling all your debts at once and getting frustrated because you are not getting close to the end, start with the smallest one and watch the progress you will make.
If you are unfamiliar with Dave Ramsey, this is one of his key concepts and one of his best concepts, I think. (Here’s more about Dave Ramsey’s baby steps.) Basically, the snowball debt payment system has you list all your debts from smallest to largest. Then, you start by finding any and all extra money you can and paying off the smallest debt payment as quickly as you can. When that is paid off, you use that momentum and put any extra money towards the next debt payment. You are still paying the minimum payments on everything else but this gives you a good sense of accomplishment as debts start disappearing.
And where is this extra money you ask? Challenge yourself to skip all eating out expenses or cut cable. Can you spend $20 less at the grocery store this month and apply it to your debt payments? Maybe you can sell some things on Craigslist to make some extra money. Be creative and use those small extra sources of income to make big progress paying down your debt.
If your budget is anything like ours, some months are trickier than others and there are always unexpected bills. It’s one of the reasons it is so important to have a savings account (or 13 saving accounts, in our case) built up.
To save more, take an honest look at your budget. Are you already saving money monthly? If so, good job! If not, what areas can you trim to save more? If it’s not a spending issue that is affecting your savings (meaning you are already living quite frugally), perhaps it is an income issue affecting your savings. Can you figure out a creative way to earn some extra money for savings? Can you baby-sit, clean houses, sell something, answer surveys online, or pick up extra hours at work?
Remember that every little bit adds up. We have tried to add at least $25 a month from our budget to a particular savings goal, and then save some extra income for some of our bigger goals. Since we have moved into a new house, we have decided that any extra, surprise income that we earn will go towards new carpet and new appliances. Anything we sell online is also going towards this savings goal. Slowly, we’re seeing $20 here added and $60 there. Every little bit adds up and we are seeing our savings grow.
3. Paying More on Your House Principal
Many financial experts advise taking only 15 year loans. If you can do that, good job! If you have a traditional 30 year loan (like we do), you can still take years off your mortgage.
Some people like to pay an extra $50 a month towards their principal. That’s what we did at our old house. With our next house and a slightly higher mortgage payment, our goal is to pay a yearly lump sum payment. I ran the numbers using this handy mortgage calculator.
If we pay $1000 a year towards our principal, we’ll pay off our 30 year loan in 24 years, 7 months and save $20,827 interest. If we pay an extra $1500 a year, we’re down to 22 years, 7 months and save $28,237 interest. If we pay an extra $2000 a year, we’ll pay off our 30 year loan in 20 years, 10 months and save $34,373 interest.
Looking at it that way, we are determined to come with an extra $1000 (our minimum) to $2000 to pay each year on our mortgage. Sometimes this amount may come from our tax refund and other years it might come from my blog earnings. However, we’re determined to find that money to save 5 or more years on our mortgage.
You can run the figures on your mortgage here. It’s proof that whether you pay extra monthly or once a year, you will save money on your mortgage.
4. Saving for Retirement
One of my big dreams is to max out our retirement funds. Yes, I am such a frugal geek that it really is a big dream of mine!
My husband and I both have 403b (similar to a 401k) through our Lutheran school teacher retirement plans. My account is just sitting there but we just raised our withdrawal amount to 3% from Andy’s paycheck. By raising it from 2 to 3 percent, by the time he retires, that is an extra $45,000 we will have in retirement…just from that tiny raise that we barely notice now. You can use this 401k calculator to see what a big difference a tiny change can make in your retirement fund, too.
I started a Roth when I was right out of college. Although I haven’t contributed regularly since I started staying home, compound interest is a wonderful thing. Once again, I ran the numbers and discovered that if I can manage to put $2000 a year in my Roth, with the compound interest, I should be able to accumulate over $500,000 by the time I retire. Granted, I am 35 right now so I have more years than some of you but not as many as others until retirement.
I ran the numbers for $1000, $2000, $3000, $40000 and $5000 to see where those yearly contributions would get me. For now, $2000 a year from my blog earnings and other money making endeavors is getting set aside for my Roth. And maybe someday I’ll be able to do more and max it out! For now, I am happy with what we are doing because something really is better than nothing. You can use this Roth calculator to see how even regular contributions, even if smaller, will yield big long term benefits for you.
Some Other Important Things to Remember
There is not a one size fits all answer when it comes to finances. Yet, I truly believe that everyone can make small changes for a bit financial impact. If you start with these four areas (debt, savings, house and retirement), you may be very surprised at how little bits add up.
What your family decides to do will look different for your stage of life. If you have a lot of debt, maybe you are focused on paying that off and not paying extra on your house right now. If you don’t have any debt, maybe you are putting the extra money into retirement.
My encouragement is this. Take a hard and honest look at your finances – now! Rework your budget. Get your savings accounts in order. Make your long term financial goals and figure how how you can get there.
As I said before, we can all do more but none of us will regret the little we do now! If circumstances or your budget change in the future, tweak your goals. You can always do more then but we won’t get these years back.
I’d love to know what small budget tweaks you have made for a big financial impact!