It's been three months since I began working with four people - two single women and one couple - to help them achieve their financial New Year's resolutions.
So far the challengers have progressed nicely. Carl and Tania Chandler, a married couple who had $14,400 in credit card debt and no savings, have paid off two of their accounts and brought their debt down to about $12,000.
Carlesa Washington, a recent college graduate, paid off two delinquent accounts totaling $1,565.
Anne Schleicher, a single 35-year-old, stopped using her one credit card and is paying $200 a month toward the $4,500 balance.
However, the challengers have struggled with one major thing: budgeting. The hardest part of this challenge is getting everyone to realize that they have to delay the extras - their wants - until they're out of debt. To do that, they have to establish a budget - and stick to it.
Because they haven't really kept to a budget, they've made a few missteps. Despite my request that Carl Chandler not buy a $600 Sony PlayStation 3, he purchased it anyway. The Chandlers also took part of their tax refund and bought furniture for their family room that they said they "needed."
"But we paid cash for everything," Carl Chandler said. "I took on extra work to pay for it, and it's the only thing I wanted."
A budget helps you discern between a need and a want. The couple had furniture in the family room; they just didn't like it. All totaled, they spent about $3,000.
Schleicher spent almost $300 one month on drinks and dining out with friends.
The thing is, to achieve your financial goals you can't keep living above your means. You have to budget whether you get a regular paycheck or your income fluctuates every month. It's certainly harder if your income varies every month; however, take what you earn in a year and divide it by 12. Your expenses should not exceed that average monthly net pay.
On the expense side, you have to budget for fixed, variable and "unexpected" expenses. The fixed expenses are easier to account for because they don't change month to month. For instance, let's say you have a semi-annual car insurance payment of $500. Rather than wait until that payment is due and scramble to pay it (or charge it on a credit card), budget every month $83.34 toward the $1,000 annual payment.
I advised all the challengers to contact their utility companies and get on a budget-billing plan, which averages your utility payments over an entire year.
As for "unexpected" expenses, I believe there are few - if any. If you own a car or a home, something is eventually going to break or need repair. If you have a pet, as Schleicher does, it's likely it's going to need veterinary care at some point. Like many pets, Schleicher's cat became sick after eating tainted pet food. You can't control when your pet might get sick or when things might break down, but it's going to happen. So set aside some money for those expenses when they eventually do arise.
If you're tired of living paycheck to paycheck, then it's time to set a budget. If you want to get that debt albatross off your neck, then budget it away. And don't view your budget as a fun-buster but rather a way to bring financial peace and order to your household.
Updates on the participants
Following are profiles of the four people taking the Color of Money Challenge:
The ChandlersAges: Tania, 39. Carl, 38.Biographical: Married with two children, Myles and Sydney, and living in a suburb of Maryland. Tania is a professional school counselor. Carl is a systems consultant. Together they earn about $137,000 a year.New Year's Resolutions: Build up an emergency fund, and pay down debt.Progress thus far: They've made a good dent in eliminating the $14,400 they owe in credit card debt. They've paid off about $2,400 of the debt, starting with the two cards with the lowest balances. They've saved $3,200.Their challenge: They still haven't developed a budget. The couple has been working hard, watching their every-day spending. They pack their lunch for work. They nixed spending on vacation trips. Carl even took on some extra work. But there were some recent unnecessary purchases, which they tried to justify by arguing they paid with cash. The Chandlers said they needed new family-room furniture. Carl purchased a PlayStation 3. I do understand why they thought the expenditures weren't out of line. The couple thought the savings they achieved in other places made room for the purchases.But if either one of the Chandlers became unemployed or disabled or if the family was hit with a major expense, such a crisis could take them out financially. They don't have enough saved even for one month to meet their debt payments, mortgage, and basic household expenses.You can't keep spending, even if you're using cash, when you're in debt. All nonessential purchases and wants, such as a vacation or a game system, have to be put off. The debt comes first.The next step: The Chandlers have promised no more spending on unnecessary items. They also promised to create a budget that will be their bible for their spending. If it's not in the budget, it can't be bought.
Annie SchleicherAge: 35Background: A single professional who works as an associate editor for a news Web site, earning about $44,000. The Pennsylvania native lives in the District of Columbia and has no children. She owns a co-op. New Year's Resolutions: Pay off $4,500 on her only credit card; build up a savings cushion of at least three months of living expenses; and pay down her student loans.Progress thus far: She's managed to save nearly $500. She's faithfully kept track of her spending."I used to think that managing my money was too complicated for me to figure out," she said. "I also used to think that if I ignored my money problems they would somehow go away - a magical fairy or Prince Charming would swoop in perhaps? But now I feel like I'm gathering the tools to be my own 'fairy.' And it's not magic; it's hard work. It takes patience and follow-through."She's been paying $200 a month toward her credit card debt. But because of interest on the card, she's not made much of a dent in the three months. I recommended that she stop her retirement contributions for the short term so she can put that money toward her debt. She's done that. She had been putting 5 percent of her biweekly pay into her company-sponsored retirement plan. Before tax that came to $88.91 each payday. After taxes, she will have $59.15 each pay period to put toward her credit card debt.Normally, I wouldn't suggest stopping all retirement contributions but Schleicher's company contributes the equivalent of 10 percent of her salary to a retirement plan whether she contributes or not. If she left the company now she, she would be eligible to take with her 80 percent of those company contributions. In a few more years it will be 100 percent. Thus she can afford for a short period to divert those funds to getting rid of her debt.Her challenge: She's still struggling to control her entertainment spending."It's depressing," she said. "I see the cold hard numbers and they tell me that I basically have to be a hermit and stay in all the time if I'm going to end the month in the black. I don't like admitting that a social life is a luxury."But as I told Schleicher, this isn't forever. Budget now, get out of debt now and you can have more freedom and fun later.The next step: Create a budget and stick to it. She needs to especially budget for her variable expenses, such as car insurance.But Schleicher has cut much of her expenses quite a bit. So the only way for her to find more money to pay down her debts, including her student loans, is to get a part-time job. She's applied for three after our last meeting.
Carlesa A. WashingtonAge: 24Background: Washington is single with no children. She is a recent graduate of Howard University and works as a concierge, assisting new apartment residents with settling in. She lives in the District of Columbia with her mother. Washington earns about $32,500 a year.New Year's Resolution: Pay off all her debts and begin saving to buy her own home.Progress thus far: With some tightening of her spending, she's managed to pay off $1,247 owed to Bally's and $318.24 owed to Macy's. So far, she's saved about $300 in her emergency fund and $120 in her home-purchase fund. She discovered a delinquent Visa bill had ballooned to $6,000 with interest and fees. She called and got the company to stop charging interest and fees. She's been putting about $600 a month toward that debt, which is now down to about $4,800."I just can't wait to be debt-free," she said.Her challenge: Washington recently found out she owes the IRS about $1,400. A former employer did not withhold enough taxes from her pay as she had indicated when she filled out her W-4 form. She's getting refunds from Maryland ($498) and Virginia ($178). That means she has to come up with $747.The next step: I suggested she cut back on the extra payments on the Visa bill to save the money for the tax bill. She may still need to make payment arrangements with the IRS. She's still working on her budget and spent an unplanned $495 to be trained as a bartender. At least it will help her pick up some extra income.Washington wondered about taking a summer vacation with friends, but she knew the answer. Not until her debts are paid, she reassured me.