The idea of the personal update series is……..well just that. They provide an update on where we are at with our financial (or sometimes other life stuff) goals, what we’ve learned and what’s next.
Maintaining focus is key to clearing debt
If you’ve read my first personal update, Introducing FI Guy 101, you’ll know I’m coming at this whole FI thing on the back foot; debt.
Job one was to arrange in what order I was going to pay things off. I’ll write another post about what that process looked like and explore the pros and cons of the ‘snowball’ vs. ‘avalanche’ methods (TLDR; I went for a hybrid).
Next up; create a surplus which I could use as an over-payment on debt priority number one. In reality, once the monthly budget from our single income, my salary, is divided up amongst the family, there’s not a lot of wriggle room. Time to get creative…..
Three ways I made extra debt payments; total £2,600
- Bonus = £2,000
- Diverted savings = £100 (ongoing)
- A refund = £500
1. Bonus payment = £2,000
My day job is a corporate sales role within the IT field. This provides a basic salary plus a bonus scheme that pays out quarterly (with an annual boost), which is directly performance related. No sales, no bonus. This means that I effectively treat my role as if it were my own business, or at least a franchise of the company I work for. It’s an important mindset to have in this job and sorts out those that succeed and those that don’t. I put the hours in, I don’t slack off and maintain professional discipline.
We structure our personal finances and commitments, plus a little saving for the emergency fund, so that they are covered by the basic salary. Bonuses are just that; bonuses. However, when they come along there’s a lot of things fighting for their attention. But the primary way in which I look at them now, with my new money mindset, is as overpayments to get debt free ASAP.
Total bonus this quarter, after tax, was £3,600. I made sure that I ‘paid the debt first’; minimum £1,000. It was important that I look at it this way. If I had prioritised other things and the debt overpayment last, I’m sure there would’ve been much less than £1,000.
This is how I divvied things up;
- Building and Car insurance 1 year = £800 (this meant I got a better deal and keep my monthly outgoings as low as possible)
- New kids clothes = £200 (ready for new school term)
- Christmas fund = £100
- Emergency fund top up = £500 (check out this article on why I’m still paying in to an emergency fund of more than £1,000 whilst still paying off debt)
- Total extra debt payment = £2,000
I could have easily done other things, namely book a holiday for next year. But we discussed it as a family and agreed that this was the absolute priority. What’s the point in being on holiday, sat with a drink in the evening and discussing how we clear this debt hanging over our heads? Best just to get our heads down and get it done.
It was the right decision and it felt good. Almost grown up, as it were.
2. Diverted Savings = £100 (monthly ongoing)
This was a tough one for me and my ego. I wrestled with this decision for a long time and talked about it in my post about saving for an emergency fund.
I liked the fact I had savings and investments, all be them small and got a psychological boost from checking the app each month and watching them slowly grow. But when I decided to fully commit to clearing the debt first, I had to question the logic of this and kick my ego in to touch.
So from the £150 I put towards savings and investment, I have reduced this to £50. Ok, so not the full whack, but I gotta have something man!
The resulting £100 I have now put towards the debt as a regular overpayment and set up the standing order for the 1st of each month.
3. Refund = £500
OK so I got lucky on this one. But once in a while Lady Fortune will walk through our door. It’s the decisions we make in those situations that counts.
It turns out I had been overpaying my utilities bills on direct debit for the last year and I got a refund of £500.
This was all about mindset. I had to ignore it and pretend it didn’t exist. As soon as I got the money in my account, I transferred it as an extra debt payment immediately.
What difference did it make?
Quite a bit, in fact.
- Grand total extra debt payment this month = £2,600
- Total interest saved = £190
- Total repayment timeline reduced by = 8 months
Overall I’m pleased with this. It’s not going to be like this each month, for sure. The refund was a one-off and bonus is paid quarterly. But the extra £100 month was a big mindset win for me and was all about maintaining focus and intensity on clearing down this dastardly debt.
I can’t see many dramatic changes for October; my monthly budgets are pretty well locked down, no contracts are coming up for renewal and I don’t anticipate any one-off windfalls.
So October’s focus will be based around two main activities:
- Keeping to budget – using cash
- Christmas fund – cashing in change pots
1. Keeping to budget and using cash
As part of my monthly budgeting, I allow myself a fixed amount of disposable income each week. I think of it weekly rather than monthly as I find it easier to manage bit size chunks over a smaller time period. One of the most important aspects I have found in changing my relationship with money is how I perceive the value of it and making it a physical thing again has really helped. Taking out my cash allowance each Monday and having to part with actual paper, rather than mindlessly using contactless, has been a big aid in keeping to my budget.
2. Christmas fund and change pots
I can’t even believe I’m using the C word already and it’s only just October.
Another benefit of using primarily cash is that you have more loose change as a result. I don’t know about you, but I hate having my pockets stuffed with coins (notes I could handle!). They swing around and give me a dead leg every time I walk. Also, I don’t want to be ‘that guy’ who has their hand in their pockets jangling their change (yes, that’s my coins I’m playing with, not my….never mind) in a sort of sub-conscious compensatory way. My wife gives such shit for doing this. Fair one.
So each evening I stick my coins in to change pots; one for coppers and 5ps, one for other silvers and one for £1s. Dividing them up just makes it easier to count but I guess I could allocate them to three different funds if I wanted to. I’ve decided that towards the end of each year I’ll cash these in and put them towards Christmas. There’s always a tonne of food to buy and we now have two kids to pay for (gulp).
So one job this month is to start counting it all up. I definitely intend on drafting in some child labour. What more could a child want on a rainy autumn Sunday than to count coins, right? Right?
So that’s the plan. See you around for check-in next month.
Here’s to the pursuit of financial fitness and freedom.
FI Guy 101
This blog has been part of the Personal Update series. Each month we report back on our the progress towards our financial goals and lessons learned from the previous month. If you liked the article please share, comment and follow us for more.
For more information on my background and financial goals, check out my first Personal Update #1 – Introducing FI Guy 101.
If you want to know why my Baby Step One (initial Emergency Fund) went against conventional wisdom and didn’t stop at £1,000, have a look at when I had to use said Emergency Fund.