Order of Paying Down by Category Type
We're in this weird place where we have enough to cover absolute essentials, and I just asked for an old job back to try and cover the non-absolute essentials (and was accepted, yay! Should be starting in a couple weeks.) It won't be a lot, but $400/mn extra can go a long way when you're tight. So now I'm trying to figure out how to allocate the extra money.
We have no consumer debt, no car payments, but TONS of student loans... up in the $150ks. But those are all low interest, and with the exception of one around $9k at 5%, are all set to be forgiven if we don't manage to pay them off in the next 10 years. Plus a mortgage. Basically, though there a some big numbers in there, none of that debt is keeping us up at night. So I'm not worrying about what order to pay those down at the moment.
What I am worried about is some other debt that's ours/but not ours and how we should handle it in YNAB and how much/when we should take responsibility for it. The first debt is a debt to my dad of $30k, 0% for when he gave us a downpayment on our first house. He lent us this money because my husband's mother owes US $30k because of an inheritance he received from his grandmother, which she kept hold of while he was in grad school so he could buy a house coming out of grad school. Which is what happened, except that she spent all that $30k in the meantime, meaning we had to borrow it from my dad until she pays us back by selling HER house. It's very convoluted.
The second debt is that my best friend was about to be foreclosed on her house, her husband finally managed to get a job that they'd have to move to, and they had no money to move. No credit to take out, nada. So they were going to have to turn down the only job he'd gotten in a year and a half. The company would pay him a $10k bonus for moving (though they did it as a bonus, so it got taxed and came out to only $7k or so. So we lent them $10k out of our line of credit (no room in our actual budget - we're scraping by) to be able to move and take the job. They just yesterday sent us $6k of that for their first payment. We'd also lent them money over 10 years ago, for which they still owe us $2k. No, we definitely did not make the wisest decisions about this financially, but as a friend, I still feel like I couldn't have done anything else.
So here's where things stand: We owe $30k to my dad with no deadline for which we expect to be reimbursed and be able to pay him back then. And we owe $4k on our line of credit with no deadline except that the interest (8.9%) keeps accruing, for which we expect to be reimbursed with interest and able to pay back then.
Technically both of things can stay completely out of my budget and I don't have to worry about them except to get the money from my mother-in-law to my dad, and the money from my friend into the Line of Credit. Otherwise, I can ignore it and it doesn't effect my budget at all.
However, YNAB has taught me to look at reimbursements as reality: You don't have the money in your possession, and things might never come through. And given the track record of the people who owe us, that's an unfortunate possibility
SO. How do we budget? As of right now, I have my categories split up between
- absolute essentials,
- (extremely) high priority (like bike tune-ups for my husband who commutes to work 14 miles each day, birthday/Christmas presents for the kids - $60 each, including dinner out or party if they want, etc),
- savings for true big expenses (Unexpected expenses, home maintenance, bike repair, oil for our furnace in the winter, car maintenance, etc)
- giving (such a high priority with us)
- youth events like camp for the kids
- debt repayment (even though owed back for those debts)
- paying down student loans
- extra retirement (we put up to our employer match, but filling up our Roth to the max, etc)
- extra fun money
What order do we go in? Obviously absolute essentials come first, no question. But after that? Do we try to pay back those debts ourselves, even though the should be reimbursed and just look at whatever reimbursement we do get as extra money? Do we do that before we put anything into the high priority funds? Is assuming we won't get the money back when we might worth not even being able to have a Christmas tree? Or do we put into the high priority categories first, leaving the rest for those debts? Or do we ignore the debts completely for now. Even then, does the high priority category come before savings? Before giving? Does retirement come before any of those?
I think of it like a waterfountain with tiers. Put into the absolute essentials, all extra then flows down to.... what? And after that is taken care of, all extra flows down to .... what next? And so on.
If the first to tiers are absolute essentials and debt repayment, it will be yeeeeeaaaaaarrrrrsss before we get to put into even high priority, let alone into saving for true expenses (the wild-card ones, the yearly/three-yearly, etc true expenses are accounted for in absolute essentials and high priority.
This would be SO helpful if someone helped me get my head around what the order of priority should be. I will be so grateful.
I *think* I've decided on a flow chart - fill up the first category, move onto the next. Here it is, but PLEASE PLEASE PLEASE chime in if you think of something different! My mind has been all over the place and I'd love feedback.
*Expenses/Kids/Monthly Bills/Not Our Money
*Non-Monthly Bills Essential (through next paycheck)
*Borrowed from Dad (borrowed from the amount we've saved up to pay him back - we didn't make it this month and had to take back what we'd saved for him)
*Unexpected Expenses ($1000)
*Non-Monthly Bills High Priority (through next paycheck)
*Non-Monthly Bills Essential (all)
*Non-Monthly Bills High Priority (all except Healthcare/Dental/Car Repair/Home Repair)
*Borrowed from Healthcare/Dental/Car Repair/Home Repair Savings
*Non-Monthly Bills High Priority (Healthcare/Dental/Car Repair/Home Repair)
*Friend Line of Credit Loan/Dad's Loan
*Rest of Savings Categories (all except Income Replacement)
*25% Giving/25% Income Replacement or Roth or Extra Loans/25% Kids' Fun-Youth Events/25% Fun!-Husband Fun-Me Fun
It looks like you've thought through your priorities and come up with a decent plan. No one except you can make the decision about what is most important to you.
One technique that I learned for prioritizing is similar to a "bubble sort" that I learned when I first started programming:
Make a list in no particular order of everything. Look at the bottom 2. If you could only pay one, which would it be. That one goes above the other. Then compare the next one up the list and the "winner" of the first 2. The more important goes up. Repeat until you have one "bubble" that floated all the way to the top.
Start at the bottom again to find the overall #2 priority.
I hope this helps.