A Rain Drop Creates an Ocean

Good morning, afternoon, and evening fellow reader.

I’m sitting at my desk at work today thinking about the changes I can make to the website, and I got to thinking, why not write about financial health? Why not write about how this same method of investing, can be applied to getting out of debt? If you are a fellow reader that can not invest because of debt, then focus on knocking that out first, so then you can get some disposable income to invest.

So here are 2 spreadsheets to help you get your financial health to top shape:

Monthly Financial Roadmap (From Vertex42.com)

Daily Financial Roadmap

So first to do is, open the Monthly Financial Roadmap spreadsheet, and it’s goal is to help you get an idea for how much money you are going through, not being accounted for. It’s also been modified to display your debt to income ratio per month, and what your monthly expense/income averages to per day.

Once you have the monthly spreadsheet all filled out, and you get an idea for what can’t really be accounted for, we move to the Daily Financial Forecast spreadsheet and zero in on the trouble areas of our finances. This is designed as a calendar, when you open the sheet, you will be greeted by an example page. Follow the instructions in that page to understand how it works. Any values that you enter will adjust the entire spreadsheet, allowing you to really see how that next purchase will affect you in the future.

A general rule that I like to do is give myself a gap, if your paycheck varies, go back over the last year and find your smallest paycheck, now round down to the nearest $50-100, this is the income that you will enter for future pay dates and then adjust them accordingly on payday, you will use this number to plan your bills around, if your expenses are lower than this number then great, instead of blowing that money on a latte, or a coffee, or whatever your vice might be, apply that money towards a debt. But if it exceeds this number, first priority should be to knock it down, that means bite the bullet, super cheap lunches or sandwiches from home, water to drink, luxuries out the window for the time being.

I use this round down method because it creates the behavior of being conscious about your money. You know that while this lowest paycheck may not be very likely, it is possible, and will you be prepared for it?

Now some of you might be thinking, “that’s a little extreme don’t you think?”. And no, this is not extreme, and here’s why.

You are one emergency away from financial ruin, you are hanging off that cliff, the goal is to get you to climb back up, and then back off the edge.

Now there is also a upside to this, when your paycheck is more than the lowest paycheck, you have all this extra to apply towards a debt.

So you have 2 choices to make: Debt Snowball or Debt Avalanche?

Debt Snowball – Is a method of behavioral modification that gives you that rewarding feeling as you are knocking out your debts from smallest to largest.

Debt Avalanche – This method is more mathematically efficient, but it may take longer to knock out a debt. This goes after the highest interest account, and works it’s way down, saving you some money from interest.

Once you decided the method of attacking your debt, next is building up a 1-3 month emergency fund. This is money that should be in the account at all times to cover your monthly expenses, or should an emergency arise. So at this point, allocate a little of that extra money for this. Once it’s complete attack debt head on.

To do this, you are going to make minimum payments on all debt except the one that is either the lowest balance (Debt Snowball) or highest interest (Debt Avalanche). And when that debt is paid off, you apply that money that would’ve been for that debt, to next in line, rinse and repeat until debt is gone. Remember how I said that the Monthly Financial Spreadsheet will give you your average cost per day? Well schedule those payments to be over this amount, most credit card accounts will allow you to schedule a limited number of future payments, so you can either do this daily/weekly. And then of course try not to use the credit card or account, unless you absolutely need to.

Now there is an exception to this, and that is if your interest rate is lower than the average rate of return on the markets (5-8% conservative rate) then focus on investing, still work on paying the debt, but not as much allocated at this point, slightly higher than the minimum payment.

Fast forward and we are now ready to invest!

If you know someone that can benefit from this, share it with them, if you have any ideas how to make these sheets better, please comment and can evolve these sheets to be as helpful as possible.

Until next time

5 Comments

  1. Great points. I get torn sometimes between paying off debt vs investing. I do a combination of both which is generally not recommended. But, if it’s going to take a long time to pay off debt, as it was in my case, I didn’t want to lose all the compounding years by not investing. Not the best approach but that’s why they say personal finance is personal.

    I do believe having an emergency fund is important. But personally, I hate having that pile of cash laying around. So I have a starter emergency fund of $1000 like Dave Ramsey recommends and I invest the rest. I have my credit cards paid off so if I do have an emergency, I can use the credit cards and then pay back the credit cards using either method you identified in the post. Again, I wouldn’t recommend this approach as the general advice of having 1-3 months of emergency fund is pretty good. It all depends on your personal situation and how much you think you need.

    Finally, it should be plainly obvious that I’m not a financial advisor or anything but I just wanted to give my 2 cents after reading your article.

    1. I do the same, pay down a credit card, bills and invest.

      But with all due respect, my link to this specific post wasn’t anything to do with your personal situation. Just from the regards of getting a big tax refund.

      Last year out refund was $73, this year it’s over $1K (and I didn’t readjust allowances when we got a little more money from our paychecks), and to be honest, I can’t stand it. That money will be going into investments as soon as it arrives. Probably not the $10 a day dividend portfolio though. That’s a separate public account just to show the power compounding on little daily investments. But the point of the link was just for the 2 spreadsheets, you had commented that you didn’t mind missing out on the extra money through the year. So you fill out the info, and then have a base living wage (amount required for bills, entertainment etc), then anything over this is investment/debt payoff. Since you are using the sheets and recognizing if you are going to have a surplus or not, you’ve already thought of where you will have those little green dollar bill soldiers working for you.

      But even after all that, whichever way you do, is you, just helping with a little pointer.

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