Rule #1 of credit counseling is when you are trying to get out of debt you must forgo some expenses while paying off debt. The advice is universal. Decrease expenses. Increase income with a part-time job. Sell some stuff to raise cash. Get the debt snowball rolling. Suck it up and double down on the smallest debt and then the next smallest until all the debt is gone. Live like a crazy person until you can scream out loud I’M DEBT FREE!

And if your debt problem is that you spend money like a moron and you just need to grow up and cut expenses and work a pizza delivery job at night until you pay off the debt, that may be good advice. Dave Ramsey has built a 55 million dollar financial empire by giving out such advice.

But what if you already work as much as you can and your budget is already frugal? What if you have kids at home and you cannot afford to pay a babysitter so you can go out and deliver pizza at night? And what if you are physically and emotionally drained at the end of the day and the thought of working a second job is likely to push you over a cliff?

And what about all that time lost during a debt repayment plan? How long will it take to repay all the debt? And what about all the new debt incurred while you live through a get-out-of-debt program? Time to start a new repayment plan? Amend the plan to add the new debts?

The message of the get-out-of-debt group is that life will begin to be wonderful again once all the debt is repaid. When the debt is paid, THEN you can begin to really save money and establish retirement and college savings plans. AFTER their debt is repaid you can start to achieve YOUR financial goals.

But what if time and time again new problems pop up that prevent the debt repayment plans from completing? You know, like when you get sick and the insurance company says the claim was filed too late even though the doctor’s office said they would file a claim, or when the car gets hit by an uninsured driver, or when your employer says that your job has been outsourced to China. And so you start over and scrounge for a new job and cancel the debt program until you can find a new car but now you have a car loan and the debt payment plan must be changed, again. It just keeps happening, over and over again. For years. For decades.  Meanwhile, your financial goals are not being accomplished because you never got to that magical point of being debt free so you could START on achieving your goals. Sound familiar?

What if you could start focusing on your financial goals today, even though you are still in debt? What if you put your long-term financial goals first, and the demand of the bill collectors second? If you sense that the tail is waging the dog in your life and that you can never get ahead because just one damn thing after another keeps blowing up, maybe it is time to confess that life sucks but your finances don’t have to suck as well. Welcome to the Life Sucks Budget.

Under traditional get-out-of-debt budgeting we put creditors payments first since we view financial problems as being a short-term problem, but under the Life Sucks Budget we put your needs first because we view such problems as a never ending, long-term reality.

Under the Life Sucks Budget we surrender to the reality that debts will never go away, and that’s okay. We no longer worry about being perfect and becoming debt free. Rather, we focus on survival and quality of life. We realize that the system was not built for us and that big banks and insurance companies and big employers will keep finding ways to pull the carpet from under us. The Life Sucks Budget is a confession that the American Dream has gone wrong and that we will no longer be suckered into believing that tomorrow will be a better day. We no longer play the game. We accept that we can longer serve two masters, and so we make the decision to fund our long-term needs first and the demands of creditors second.

Pay yourself first. That is the guiding principal of the Life Sucks Budget. So with that in mind, those who adopt the Life Sucks Budget will take the following actions.

  • Emergency Savings Account. Every financial adviser worth their salt will advise that clients save 3 to 6 months of their monthly expenses in cash. That’s good advice. Life sucks and so it is necessary to be prepared for periods of unemployment due to frequent job changes and layoffs. So, the first dollars you earn should be tucked away into a separate bank account, preferably at a bank you don’t presently use and ideally at a bank located in a different state. Why a bank located outside of Nebraska? Because creditor judgments may only be levied on bank accounts located in Nebraska. To garnish an account located outside Nebraska the creditor must register their judgment in the foreign state. So, a wise person sets up their emergency savings account in a far away bank. With the ability to open accounts online these days, this is really easy to do. Heck, if you can get an account in Canada that is easy to access, go for it.
  • Pay Nondischargeable Debts Before Other Debts.  The Life Sucks Budget anticipates that filing bankruptcy from time to time is probably necessary.  But not all debts can be discharged in bankruptcy, such as student loans, child support, alimony and recent income tax debts. So, when deciding what debts to pay, it is smarter to pay debts that bankruptcy cannot discharge before paying other debts, like credit cards and medical bills, that can be discharged.
  • Tax Debts & Bankruptcy.  Generally speaking, most income tax debts can be discharged in bankruptcy IF the tax return was filed and IF three years have gone by since the return was filed.  (This is a simplified version of the general rule and there are many additional rules that apply.) The take away here is that if you owe a lot of income tax debt, make sure your returns are filed and perhaps you should not pay any of the debt voluntarily and just wait until the debt becomes dischargeable in bankruptcy. Conversely, if you do not owe a lot of tax debt then you should pay off that debt before paying credit cards or medical debts since the tax debt cannot be discharged.
  • Contribute to Retirement Accounts.  The great majority of retirement accounts, including 401(k) plans and tax qualified retirement pensions, are protected in bankruptcy. So, if life sucks and you view filing bankruptcy as something that is inevitable, then maximize your contributions to your retirement accounts and NEVER withdraw funds from your retirement to pay off debts that could be discharged in bankruptcy.
  • Pay Extra on the Mortgage.  Nebraska law protects up to $60,000 of equity in your home, even if you file bankruptcy. Paying a lousy $100 extra on the mortgage can be the difference between paying off a mortgage in 15 years instead of 30 years, so if you have less than $60,000 of equity in the home you should consider paying extra on the loan every month.
  • College Savings Plans. Contributions to a 529 College Savings Plan made more than one year prior to bankruptcy are exempt and protected. If you have minor children that plan on attending college one day, contributions made to 529 savings plans more than one year ago are protected even if you are forced to file bankruptcy.
  • Pay off Car Loans.  Nebraska law protects up to $10,000 of equity in a vehicle, so it makes sense to pay off car loans ahead of other debts so you reach a point of economic freedom from the threat of repossession.

Of course, by paying yourself first you will be short on money to maintain minimum payments on all your debts. And that’s okay, because we acknowledge that life sucks and we deal with that problem later by filing bankruptcy or by debt settlement or by letting the debt expire over time. We pay creditors what we can, but we don’t worry if the account goes into default because what is more important is that we fund our long-term needs first so that we don’t wind up old and poor.

The Life Sucks Budget is not a call to financial irresponsibility. Rather, it is a call to wake up and to smell the coffee of today’s economic system where lower wage Americans never seem to improve their condition because they pay creditors first. The Life Sucks Budget is actually a call to work hard so that your financial needs are met and it is a reminder that, even with low income, you can achieve financial success if you put your family’s legitimate needs first and force creditors to accept what is left over.

Image courtesy of Flickr and NOAA Photo Library.