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Ep. 46: Building a Budget with Diana Stone

We love to talk about money here on The Gutsy Podcast. It’s such a secretive, taboo topic. Like people literally shy away from it. You talk about money, budgets, or about spending and people just completely shut down. Yet we all have it, use it, and are challenged by it. So why do we not talk more openly about??

Today I’m really excited to have Diana Stone as our money expert. She has been studying personal finance for over 20 years and coaches people on building a budget. Now I know what you’re thinking, that’s a dirty six-letter word. But Diana is here to tell us how it actually creates permission to spend without guilt — I’m okay with that. It’s all about creating a plan for getting out of debt and saving for the future. Diana, welcome to The Gutsy Podcast.

The Back Story

Laura: So let’s talk about money. How did you get into it in the first place? Is it something you were born to do or something one day all of a sudden you wanted to get into?

Diana: You know, I think I always loved to talk about it. My parents were the typical American parents that didn’t talk to their kids about money. So we kind of only learned what we’d see them do. And luckily I saw my parents do really wise things with money. Like I can actually remember getting my first paycheck and back then, you know, they literally give you a live check and you had to go to the bank and cash it. And I remember thinking, what do I do now? Like I have no idea. And I would see my mom every payday get envelopes from the bank and put money in different envelopes. One might’ve said mortgage or one would have said gas, groceries. And I’m like, okay.

So I literally cashed the check into a bunch of small bills, made the banker give me half a dozen envelopes, and I went home and I just stared at them like, okay, how do I do this? Because again, nobody really taught me. But I was like, Oh, I remember mom always had a three by five card too. So I literally pulled out a three by five card and started writing like rent, electric, cable and writing it down and figuring out like, okay, this is how much I have, this is how much I need to pay bills. And that’s just kinda how I started budgeting.

One of the biggest tips I will put out there that Dave Ramsey taught me, and man when I made this change it was life-changing. I used to always think for a budget, you take, well, this is how much I have, these are all my bills, and at the end, if the numbers are positive, yay! I win, right? And I do whatever I want with what’s left over.

Well, the principles he teaches — and it really is so powerful — is you should take your number at the top, do all your expenses, and that number at the bottom, the goal was for it to be zero because if it’s a positive number that means it’s going to dissipate. You’re just not even gonna know where it went.

So you go back up to your budget and go, well okay, what am I working on? You know, am I working to pay off a debt, am I working to save for an emergency fund? And you put that extra in that bucket and then you do the math again and you get to zero. And once I started doing that, it was just, it was mind-blowing. All of a sudden I made such huge traction because I gave every dollar a name.

seven baby steps

Laura: So that’s really interesting ’cause I never thought about it like that. So let’s say, theoretically, you have $1,000 leftover at the end of the month. That amount you’re saying is not leftover. We’re actually reallocating where that thousand is going, granting the permission to spend. Because if you want to go out to dinner more, you can add $300 more to your going out fund or if you’re paying off a debt, you can shove it over there.

Diana: It is, exactly. And you know Dave’s principles (and again, I’ve lived them, I’ve taught them for many years, so I’m a big believer in them) is he has certain baby steps. So there are seven baby steps, it’s really simple.

1 | The first one is you create what’s called a baby emergency fund of $1,000 and no, that’s not a lot of money, but that’s just enough to put a little cushion between you and life. So when you go out from work today and there’s a hole in your tire, you can replace the tire. So you get a $1,000 in a baby emergency fund, you put it somewhere where the pizza guy can’t touch it, so don’t leave it at home in a drawer. Put it in a bank account.

2 | Then you add up for baby step two all of your non-mortgage debts. Add them up. I don’t care about the interest rate. This is the point in the conversation where people go, Oh nope. I got to know about the interest rate. This is about math. If it was about math, nobody would have credit card debt because they’d understand 13% interest is crazy. So we’re taking math out of the equation. This is a behavior issue, not a math issue.

So we line up those debts smallest to largest, maybe Visa’s 100 bucks, maybe Discover’s 300 bucks. Then it goes to student loans. So you lay those out. Once you have baby step one done. If you, in your example, you had $1,000 leftover, you would take that thousand dollars and say, okay, boom, I just wiped out the $100 Visa. I just wiped out the $300 Discover and now you have $600 left. Where does that go? Well, that goes to your next debt and maybe again it’s just student loans, so it goes on to that debt. So the idea is to work through all of your debts smallest to largest until you get through baby step two. On average, that takes people 18 to 24 months. So it’s not quick, but it is so worth it.

3 | Once you get through those, you move to baby step three which is go back to your emergency fund and build it up to something substantial. You want three to six months of expenses and just a good money market. We’re not investing. This is your rainy day fund. It’s not sophisticated growth stock mutual funds. It’s just there for emergencies and when I say three to six months, my recommendation is always if you’re single or if you’re a one-income household, you really want to push closer to six months because if you lose that job, that’s a big deal.

If you are a two-income household and you’re both making about the same money, three months is probably okay because the odds of you, especially in different industries, losing your job on the same day are pretty slim.

4 | So you get that done. You go to baby step four which is saving 15% of your income into retirement, baby.

5 | Step five is saving for kid’s college. Good news: If they’re already grown and out of the house or you don’t have any, that’s a whole step you get to skip.

6 | Then you jump to baby step six which is paying off the house early.

7 | Once you have the house paid off early, then you just give like no one else. Which is baby step seven which is a really fabulous step to be at.

So to answer a very long answer to your short questions, you take that thousand dollars, ideally you put it back in your budget or whatever baby step you’re working on. But yeah, if you decide, Hey, we’re going to go on a great vacation next month, I want it for vacation line. Great. Just give it the name. I want to eat out more. Okay. Put it in that bucket. But understand when that bucket’s empty, you have to stop.

And I think that’s where a lot of like what I would consider the negative connotation that’s constantly at play. It’s like I have a strict budget that I can’t get to do the things I want to do because people often think budget means live in a cave and come out on triple coupon Thursday.

I tell people this in the class all the time: I truly don’t care if you want to spend $15 a month eating out, it’s your money. I’m not going to lose sleep at night. It’s yours to do with what you want. Just know that you’re doing it, own it, and be okay with it. But I can tell you from 20 years of coaching people and 10 years of teaching class, hands down the middle class is always either driving their retirement or eating their retirement. It never fails. And I tell people that in class and then their homework that week is to work on their budget and they all come back and look at me and go, how did you know? Because they’re either eating their budget or their retirement or they’re driving the retirement. And I’m like, because I’ve done this for a while, this is what happens with middle class.

car payments

Laura: Let’s talk about car payments. So tell me kind of your overall feeling about them. You know, a lot of us have them. Why do we want to avoid those?

Diana: Dave always says that debt is normal — be weird. And it’s such a truth because I don’t know many people that stroke checks for cars, but I’ll tell you what, the ones that do are in a very financially healthy place. People, we love our cars, especially with the launch of social media (however many years ago that’s been about now). You know, I gotta look the part.

Well, the average car payment in America right now, are you ready for this, is $545 and it’s for 69 months. That’s insane. And I think the statistics something like 40 or 50% of them don’t even get paid off before they turn around. They take that debt, they buy the next new shiny car, and they roll that loan into the new one and it just keeps going.

And if you never made a car payment but you took that car payment for the 40 years (given a normal person works say 25 to 65) and paid yourself that car payment, put it into a good gross stock mutual fund earning 12% interest, the number was something like $4.8 million. And of course, I will always have financial people. Side note: I’ve been working in corporate finance for 20 plus years, so I work with all the accountants and all the numbers people. But I always have someone who goes, Oh, you can’t get 12% in the stock market. Okay, first of all, you can. But that argument aside, if I’m half wrong, you are still a multimillionaire. Just don’t do the car payment.

You really can save up and pay cash for a car. That first one is not going to be glorious. It may even be a little embarrassing, but if you take what you’re paying for a car payment, once your car is paid off and you take the next year and you keep making that car payment to yourself, whether it’s $300, $500 — whatever the number is. Say it’s $500 (that’s easy math for me) that’s $6,000 you’ve paid yourself for that car. Take that $6,000 and the car you’re still driving, turn them in and upgrade to a car $6,000. Do that for another year, two more years, and upgrade again. You can slowly be driving nice. You know, $15, $20, $25,000 cars that you’ve slowly paid for yourself and you put that money into a good mutual fund. So then when you save that up, it’s made interest and you will get to a point in life where the interest is buying your new cars now. No, it’s not a new $80,000 Mercedes every 16 months, but every five to seven years you can buy yourself a nice 20 some thousand dollar car.

We’re an instant gratification culture, especially again with social media. I was telling someone just recently that 20 or 30 years ago if you saw someone driving down the road in a Mercedes or they had the latest, you know, high-end purse, you kind of knew they were rich and they are wealthy I should say. And they really were like, that was the norm. Nowadays, there’s so much fake rich out there and people trying to keep up on social media that they get sucked into it and I’m constantly trying to teach that lesson to my daughter. I’m like that Gucci belt doesn’t mean rich, you know? Or doesn’t mean they have money. It could very well mean debt. You have to kind of navigate through that.

eye on the prize

Laura: We have to remind ourselves that you can be struggling with finances and have the same debt issues as someone who has a lot of finance. The ratio of debt to income is the same. Whether you make $10,000 or a million — debt is debt, the weight doesn’t go away. It just gets bigger.

Diana: I tell people all the time, it truly doesn’t matter if you make $20,000 a year or $200,000 — it matters how you spend it. Because if you’re really bad with a $20,000 salary, you can’t outearn dumb. People think that all the time. Well, I’ll just make more money. Well, here’s the thing: You make $200,000 and keep the same habits you had, you’ll just do dumb with bigger zeros. You won’t fix it because again, we’re not fixing a math problem.

It’s 80% behavior and it’s hard. I’m not gonna lie, like paying off the house — it was hard. There were a lot of times we didn’t go out with friends. We didn’t vacation. But I’m like, you know what, I want to retire young. Eye on the prize. I’m focused, I’m doing this. And it was a team effort for sure.

We had a debt-free chart on our fridge and every payday when we could put extra on that house, we had a chart where we just colored in the line and we watched it grow. We had a 15-month plan to pay off the last $50,000 and we got so intense in the end, we did it in nine months.

A lot of you have food at home, just go home, don’t eat out. There’s food in the house. And it was painful, but I’m telling you what, the day that we popped the cork on the champagne and told Wells Fargo to hit the road. Oh, so worth it.

Your income is your biggest wealth building tool. So you’ve got to free it up. But Americans are, this, again, it’s normal, but 78% are living paycheck to paycheck. So they’re bogged down with student loan debt, with mortgages, with sometimes two car payments in a household. They wake up at 35 and go, Oh we should start thinking about retirement. Oh, we don’t actually have any extra money to do that. And that’s 35, which seems to be the light bulb age where people are like, uh-oh, and then they need to start thinking about it.

Time, value, money, man — that’s a big thing. My teenager understands that. She started her first job last year at 16 and that same year she opened her Roth IRA cause she’s like, um, I want to retire young. I’m like, well this is what you have to do. You actually have to save now. And she was like, okay, I can do that.

money coaching

Laura: So what do you typically coach people through when they’re just feeling really overwhelmed and so beat up?

Diana: I always tell people in those situations to first, open the drawer. It’s not that bad. And of course it’s metaphorically, but you talked about the pile of bills. So often people just will take those bills and like stick them in a drawer. And I’m like, look, we just have to open the drawer and see how bad it is because it’s normally not as bad as you’ve built it up in your head. And honestly, if there are 20 bills in that pile, there’s probably really only six. The rest of them are price statements from prior months you just didn’t open.

So I’m like, let’s clear out the chaos and look and see what we really have. And the key is to just put it all down. And I always tell people a budget is not a budget unless it’s written down. It’s in Excel, it’s in an app, it’s in something. I just laugh when people were like, I have a budget. Okay, where’s it at? Let me see it. It’s in my head. That’s not a budget. I need it not to be in your head. So you sit down and you just lay it out again, simple as pencil and paper if you want and say, okay, I owe Visa a hundred, I owe student loans $83,000 (whatever the number is), and you write it down and go, okay, this is my truth. This is what I’ve got.

Now let’s look at our income because you’ve only got two options: What’s coming in? What’s going out? And if you do that income minus expenses and it’s a negative number, you don’t get to go, yay, it’s positive! Then we’ve got to fix something. You’ve got to sell something. You’ve got to start delivering pizzas on the weekend and pick up an extra job. You have to sacrifice to win.

So first, let’s figure out where you’re at. Are you negative zero or positive? And then you just kind of start building a plan from there and the plan will just instantly give you such hope because you’re like, okay, I can, I can do that. It’s on paper. I see it. This is what I’m going to go do.

And I cannot stress enough. Please, please, please. If you guys hear nothing today, hear this, start fearing cash again. We don’t fear money because all we do is swipe plastic. You’ve got to start fearing money. That really is the biggest takeaway. I tell people all the time, you want to look at that budget and go, okay, what are the categories I overspend on? It’s normally eating out, groceries, entertainment, sometimes clothes. Those are normally the big ones.

Those are ones that you can have cash for, like taking you back 20 years when I sai my mom got these envelopes and put cash in them. So I’ve always done that. And I think one of the reasons I was drawn to Dave is he actually teaches the envelope system and I’m like, Oh yeah I do that.

So I have like a slot in my wallet for eating out. And that was a number we decided on. This is all we want to justify spending on eating out. Again, I don’t care if it’s a hundred bucks or 1000 bucks. Know it own it. Put it in your budget. But then when that envelope’s gone, you’ve got to stop because statistics show that if you swipe plastic, and I don’t care if it’s credit or debit, you will spend 12 to 18% more on your purchases because you’ve lost the emotional connection to money.

And in grocery stores, it’s even more dangerous because that 12 to 18% statistic jumps to 18 to 24% that you will spend more in a grocery store. It’s why credit card companies give twice the cashback on grocery stores. They’re not being generous. They know you’re going to spend up to 24% more on your purchase. You’re probably not going to pay it off and they’re probably gonna make two grand on that $4 that you got back at the end of the year.

student loan debt

Laura: You brought up another topic earlier, which I know is a giant thorn in a lot of people’s sides, and that is student loan debt. Can we just talk about that for a hot second?

Diana: Yes. Because I have a high school senior, I have really been studying that. I didn’t have college debt, my husband didn’t have college debt. So when we graduated college in the 90s, we thought we were broke. We looked at our friends who had student loan debts went, Oh no, we’re even — they’re broke!

So and now, this culture, like the things I’ve learned in the last few months studying this, it’s out of question that student loans are such a — oh, I could talk all day about those. But I feel like particularly my generation, so the 30 to 35-year-old people listening, I feel like student loans got really pushed across the table when we were applying to college. It was like, Oh, we’ll help you here. Oh, we’ll help you there. When you’re going into college you’re thinking, yeah, I need all the help I can get. I’ll sign this paper that I have no idea what it means. And then 10, 20, 30, 40, 50 years later you’re still talking to, you know, Sallie Mae or whoever your student loans are from.

Laura: So how do you typically work with people to get through their student loan debt?

Diana: It really just gets rolled up in baby step two. So it’s a non-mortgage debt. A podcast I highly recommend is Anthony O’Neil. He works for Dave Ramsey and he was one of their speakers. He actually just put out a book that I want to get and read but haven’t yet. It’s called Debt-Free Degree. I’ve heard great things about it. And the podcast he put out, I think it’s only gonna be for eight weeks, is called Borrowed Future and it talks about how student loan debt is $1.6 trillion.

The only way to dig out of student debt is to just get sick and tired of being sick and tired and dig in. But you have to get mad. You cannot wander out of six-figure student loan debt. And that’s, you know, middle-class. I often say to middle class is a challenge to coach only because they’re not that uncomfortable. So when I help some nonprofits in town that have lower-income housing and I’ve met with those people and they are just like, yep, I’ll do whatever you say and they are ready and they’re on fire and they are kicking butt with a small income. But then when I work with middle-class people, they’re like, you know, it’s not that big a deal. It’s a couple hundred dollar student loan payment and it’s really hard to light that fire because they’re not uncomfortable. You’ve got to get uncomfortable and mad to get out of that.

building a budge

Laura: Let’s get into building a budget. So someone comes to you and you’re like, Oh my gosh I’ve never built a budget, it’s super overwhelming to me. I’ve got this drawer of stuff that I don’t want to deal with. I don’t even know how to begin.

Diana: First, figure out all our debts/debt payments. Then put it to the side and go, okay, what do I do in my life that I’d like to sustain? And again, if you’re in a situation where your net number is negative, then the first thing you do in order is you cover your basic needs (so your housing, whether that’s rent or your mortgage, your transportation, because you got to get to work. Gas, electric, water. Basically just things you need to survive and get to work). Those have to be at the top of your list because again, if you’re negative, then at some point you’re going to have to draw a line and say, okay, you people below the line can’t get paid. And that’s a reality.

So you’ve got to start with necessities and once you lay them out, you’ve got your food. I’ve to throw that in there. We need to eat. Now, we don’t need to go to Outback every week, but we need to go to the grocery store. So you’ve got to have your food, your shelter, your transportation, possibly clothing. That sometimes though can go a few months if you’re in crisis mode.

Then you start laying out, okay, well you know, what else do I pay? That’s more in like the luxury category. You know, your Netflix, your internet, your cell phone, things that I could live without if I had to, if I lost my job tomorrow, but they’re in my budget, I like them. I’d like to keep them. So you just lay all those out and people will always forget about things and it takes about three months to stop beating yourself up and go, okay, I got this. Because the water bill, for example, that always comes once a quarter. People were like, yeah, I’m doing great. Month one. Yeah, I’m doing great. Month two, month three, Oh crap, I forgot about that. So people forget about those non-recurring bills.

So it’s really important to kind of have them off to the side, get a list, and know when they’re coming because nothing gets you quicker than those once a year bills that you forget about. Your car registration is due every two years in Maryland, you know things like that are just going to come up. So it’s important to have those laid out.

And then again, income minus expenses. If you have anything left, you put it into whatever baby step you’re on. If you have a negative, you figure out who can’t get paid that month and please, for goodness sake, pay the mortgage before you pay Discover. I realized that Wells Fargo is not going to call and beat on you like discover is, but Discovers a monkey in a cube 800 miles away that is trying to invoke an emotion on you to get you to pay them. And you know what you’re going to do? You’re going to pay them and not pay your mortgage because people do it all day long and it’s heartbreaking.

Wells Fargo, I just pick on them because they were my mortgage company, they’re going to be professional. They’re not going to call and harass you, but a credit card company will. So you’ve got to take control of that and be able to just say, I’m sorry — you’re under the line this month. I will try my best to get to you next month. But hold your ground and know that, hey, I can’t swing it this month. Again, if you’re in a positive situation, put that extra money in whatever baby step you’re working on. Hopefully it is, you know, paying off that student loan and kicking Sallie Mae to the curb.

Which bill do I pay first?

Laura: I love earlier that you cleared up a question that I think goes through a lot of people’s mind: Do I pay out the high percentage thing first or the smallest thing first? And you said listed smallest to largest and start from the bottom and work your way up.

Diana: Yes. And here is why. If you’ve ever been on a diet that first week, whether you’re going to the gym a bunch or you’re starving yourself, whatever you’re doing at the end of the week, when you get on the scale and you’ve lost a couple pounds, do you not just feel so motivated and excited and you’re just ready to conquer the world?

Well, that is what happens when, I’ll keep using that $100 visa example, at the end of week one when you pay off that $100 Visa, you are so excited and you’re like, that’s it, I got this! And you’re ready to move on to the next one. And you get to take that minimum payment that you were giving Visa and now put it on Discover or whatever your next one is. And that literally gives you more money to keep fighting it and your momentum increases and your excitement and your will and it’s just, it’s a beautiful thing.

If you took $100 and put it on an $83,000 student loan at the end of week one, would you give a shit? No. You just wouldn’t. Now I might’ve had the higher interest rate, but you’d have almost felt defeated like, Oh I starved myself all week and I gained a pound. That’s how it feels.

So yeah, smallest to highest because it’s going to build this huge momentum for you and that’s what you want.

extra wisdom

Laura: So I’m going to start to round up here, but I would love to just kind of open it up if there’s any other budget or financial advice that you feel like our listeners should have in their tool kit today?

Diana: Well the big thing was cash and we covered that. The only other thing, since it’s that time of year, I just wanna throw out there that — I know some people are going to be surprised by this, but — Christmas is still in December this year. It didn’t move. It is the same day every year, but yet so many people are like, Oh well, well Christmas, I didn’t know that was coming and little Jimmy needs a bunch of plasticky toys or he’s going to end up at his therapist office in 20 years if I don’t get him the right plasticky toys.

That’s just crap. It’s their just way of justifying like I have to go out, the consumerism, and the shopping. If you’re not there, if you’re working on getting out of debt or your budget just can’t swing it, I promise — little Jimmy is not going to talk about this to a therapist. Okay. He might, but don’t hold it against me.

Kids don’t need all that stuff. Spend time with them. Go for a hike. Think of ways to have an experience that doesn’t cost money. I think as parents, especially working parents, there’s that guilt that if we’re not around all the time, we just throw stuff at them. And all that does is compound the debt. And especially if you come from a big family. Maybe be the one that suggests how about we draw names this year and we all get someone one gift. I guarantee if you do that, 40% of the people in the room are going to exhale and go, Oh thank God someone said it.

Because if 78% of people are living paycheck to paycheck, count your family members that you buy Christmas presents for. That’s how many people are going to be happy with the suggestions. But we just over materialize Christmas.

What Does Gutsy Mean to You?

Diana: Gutsy to me means doing it scared and I don’t know what it is. It’s whatever the it is in your life. But for me, there’s a lot of things I’ve done over the years that have been way outside my comfort zone and I just, I believe if you just do it scared, that’s where the magic is because so many people want to wait. Oh, it’s not the right time. I don’t have enough money saved to do that. Well just do it. Scared it’ll work out.

connect with Diana

Closed FB Group | Debt Free Diana

Email | debtfreediana@gmail.com

Thank You, Gutsy Tribe!

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