Have you ever asked yourself what being debt free could do for you? (And your budget?) Most people never even consider the idea, or if they do, they don’t follow it through to its logical conclusion.
Sure, you know you’d have more money if you didn’t have all those payments, but have you ever sat down and done a before-and-after budget?
Here’s an example of what being debt free could do for your budget.
Your expenses — with debt
Suppose you’re a couple living in a relatively low cost of living area. You each have a good full-time job, and your usual monthly after-tax expenditures look like the ones below. (If the numbers make you glaze over, concentrate on the paragraphs before & after each section.)
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House payment (PITI) $980.07 2nd mortgage $183 Car payment #1 $312 Car payment #2 $289 Car insurance $110 Gas for cars $230 Student loan $293.75 Credit card #1 $246 Credit card #2 $60 Credit card #3 $127.20 Credit union loan $85 |
Cable TV/Internet $86 Cell phones $152 Netflix $17.47 Life insurance $31 Gas/electric $118 (level plan) Gym membership $50 Groceries $625 Eating out $240 Blow money $300 Water/sewer/trash $58 Clothing $150 Miscellaneous $120 |
Taken by themselves, probably none of those payments would make you gasp. Your 3 biggest expenses are your house payment, groceries, and one of the car payments. But together, they really add up.
In fact, your total spending is $4863.49 each month. If you bring home $5K a month, that only leaves you $136.51 left over. Many people try to save whatever is left, but somehow their bank account always ends up empty before they can do that.
Your expenses — WITHOUT debt
Now let’s look at what your expenses would be if you were completely debt free. Basically, we’re going to cut all of those “low monthly payments” out of the list. That leaves you with a much shorter list:
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House taxes & insurance $190 (the “TI” portion of “PITI”) Car insurance $110 Gas for cars $230 Cable TV/Internet $86 Cell phones $152 Netflix $17.47 Life insurance $31 |
Gas/electric $118 (level plan) Gym membership $50 Groceries $625 Eating out $240 Blow money $300 Water/sewer/trash $58 Clothing $150 Miscellaneous $120 |
The new total? $2477.47 each month. That’s a heck of a lot less than $4863.49. And it means that after you’d paid all of your monthly expenses (many of which are completely optional) out of your $5K take home pay, you’d have $2522.53 leftover each month. That’s a whole lot more than $136.51. About 18.5 times more.
Even if you decided not to go whole hog and kept your mortgage instead of paying it off early, that’d only add $790.07 back to your monthly expenses. You’d STILL have $1732.46 leftover, which is nearly 13 times more than you had left when you had payments coming out your ears. So maybe the real question should be…
What could you do with 13 to 18 times more money?
The short answer is: pretty much whatever you feel like doing. In the scenario above, one of you could quit working without changing your lifestyle at all. Or you could shovel money into your retirement funds and both retire ridiculously early. Or you could travel. Or start a family. Or pay cash for a new car every year. Or become a millionaire. Or, well, I’m sure you could think of something.
And you should think of something. Think of what you long to do in your life — and then figure out what being debt free can do for your budget.
In other words, imagine your life without all those payments. Imagine freedom. And then make it happen.