5-Step Plan – Step 1 – The Minimalist Budget
You’re at start of a journey, but in many ways you’ve made the most important decision. You’ve decided to do something about it. In this first step we’re going to build a minimalist budget that exposes the hard inner core of our most unavoidable expenses.
You’re at the point of maximum frustration. You’ve tried a few things but realise that you need a more organised, comprehensive approach. You’ve finally decided that you have to do something about your debt situation.
But where to start?
There’s only a certain amount of effort and energy you can dedicate to a task. As you probably know from bitter experience, if you don’t put your effort in the right places, and you don’t see some results, you’ll get discouraged and it will become impossible to continue.
Flicking through websites, we find many people who claim to have paid off staggering amounts of debt in record time. They make it seem almost too easy. Just download their printable and you’re home free, right? But you already know that’s not how it works.
You can’t transform a difficult debt situation into a debt-free life at the flick of a switch, or by applying a simple “life hack”. It’s going to take time, effort and a plan. The plan focuses your effort where it has the most effect and helps measure progress towards your goal.
Before you leap, take a step back. Take control of the smallest and easiest and most essential thing of all: Your day-to-day essentials. Draw up a minimalist budget of your most essential costs. This will give you an idea of what it’s possible for you to save each month.
This article explains how.
Your Minimum Necessary Spend
In this first step, we’re going to try to answer one simple question: What is the minimum amount of money you need to survive? This is the amount of money you need to cover your essential costs.
By “survive”, I’m not suggesting you make any radical transformations to the way you live today. Keeping the same home, the same job, the same school, what is the lowest spend you can get by on?
To get to this (monthly) number, cut out everything from your budget except the absolute essentials. There’s a table you can look at below, but you should adapt it to your own needs.
Hopefully this number is quite a lot lower than your income.
What if my minimalist budget is higher than my income?
In this very unfortunate case, you have a very real problem.
Regardless of how you got into this situation – and I’m not here to judge – if you decide now to take control of things, you have some radical decisions to make.
This situation is not the subject of this article. I’m going to refer you to another article that’s coming soon (and will be linked to from here). It’s title is “What If You Can’t Afford The Life That You Live?”
To summarise: if your current life can’t fit within your income, then you must change something more substantial than the way you shop for groceries. In this case, the options start with refinancing your debts and finish with declaring personal bankruptcy. Which you pick depends on exactly what your situation is.
The key piece of advice is this: Your situation is dire, and you need to grab the bull by the horns. In the financial world this is best done with the help of a professional financial adviser. They can take you through your options. Either way, every moment you delay now makes the problem worse. The sooner you decide to tackle it head-on, the less damage you will have to deal with.
Click on the image below to download the printable PDF worksheet. Adapt it to your own needs, and fill it with monthly costs, so you know what your budget looks like each month.
Some categories are notably absent: restaurants, entertainment, alcohol, cigarettes, to name a few. This is not a place for luxuries. You can vacuum your own home, iron your own shirts, clean your own sheets and supervise your own children (if you’re not in work), so there are no cleaners, babysitters, laundry services, etc.
Some categories are very important. You must not fall behind on your contractual payments to your landlord or to the utility companies. Most important of all, you must always pay the minimum required amount on any outstanding loan.
I Can’t Live Like That!
I don’t expect you to.
Bear in mind that we do not expect to ever live on this budget. We’re just trying to figure out what the least we could possibly live on is. That way we have a realistic starting point for the budget we’ll build in step two.
The reason we do it this way is that if you start with your current spending and start thinking about what you can cut, you’ll never bring your budget down as far as you would if you starrt with the bare minimum.
On the other hand, if you absolutely had to, you could cut your spending down tot his number in a day! This requires no radical restructuring of your life. You’re not moving home, changing the kids schools, chaning jobs or ditching your phone. If you really had to, you could live on a lot less than this.
This is the hard, inner core of your spending. The cash that goes out of your account each month because if it didn’t, things would start to break down. Everything else is an optional extra.
Ok. I Have My Minimalist Budget. Now What?
You have the number, and hopefully it’s a long way below your income. If you subtract this number from your income, that’s the maximum you could possibly contribute to paying off your debt in a month.
Now you have two choices.
You can skip ahead to Step Two, where you’ll build a budget and tracking system that will help you pay off your debts over time.
Alternatively, if you want to be a bit aggressive, and your household can handle it, you could choose to live on this extremely constraining budget (or something close to it) for a week, or a month.
I’m not suggesting that’s fun, or sustainable. It is, however, the financial equivalent of a cleanse or a detox. All the toxic little expenditures in the month are forbidden during this period. You’ll cut out everything non-essential, and you’ll pick the least expensive version of everything that’s essential.
It will help you relearn the difference between something you like and something you really need. Do this for a month and you’ll see your expenses in a whole new light.