Create a “Dream Budget” for Extra Motivation

One of the reasons the idea of budgeting is depressing for many of us is because it is the point in time each month where we realize we don’t have a lot of breathing room. There is simply no disposable income after the mortgage, the car payment, the credit card bills and the rest of our spending categories. What if you could take a magic eraser and wipe out all those debt payments?

Unfortunately, no magic debt eraser exists, but like I tell my son, “let’s pretend.” Let’s pretend for a moment that you do not have any debt. How much different might your budget look?

That’s the idea behind creating a dream budget, an exercise I have toyed with informally a few times, but was sold on after reading a post at Enemy of Debt. Here’s how I created our “Dream Budget.”

  1. Grab a copy of your most recent budget. Highlight the amount of total expenses, total income and any savings contributions you are making.
  2. Make a second budget minus any payments related to debt. Leave the mortgage payment for now, but remove credit cards, student loans and car payments.
  3. Using this new “dream budget,” calculate the difference between total income and total expenditures. This difference is the amount you are spending each month to service debt.
  4. Find a new home for the difference. What will you do with this new excess? If you are like most families with a $400 car payment, and several thousand in credit card debt, you could easily free up $700-$800  a month by paying off debts.
  5. Break out “savings” category into more targeted goals. Finally, there is enough money to invest in a Roth IRA, save for the kids’ college tuition, put a little away towards a replacement car, and maybe even a little towards a down payment on a new home.

What’s standing between you and your dream budget? Debt. Debt is like a soul-sucking black hole in your financial world. Being in debt is worse than the worst job you’ve ever had, and the worst relationship you’ve ever been in, combined. To put it bluntly, being in debt sucks.

Most of us are aware of this fact, at least intellectually, but by creating a dream budget you finally have evidence of the things debt is robbing from you with each required payment, and it has a way of getting you fired up, emotionally.

Consider just the interest accumulation on your debts. How would you react if your bank was reaching in and grabbing $148 a month out of your checking account? You would be outraged, and rightfully so! Well, that’s the equivalent of allowing credit card companies and other loans to tack on interest each month on a large balance of debt. Get rid of it once and for all, and free your budget up to do bigger and better things.

Keep this dream budget handy if you feel motivation for your get out of debt plan waning. It might just be the kick in the pants you need to get back on track and make your dream budget a reality.


  1. What a great method for helping people understand how much they are really spending on debt. I love it 🙂

  2. I have actually done this as well. It does provide some extra motivation to find a little bit more in the budget that can be used to pay down debt. The faster you get out of debt, the faster you can live on your dream budget.

  3. I have done this myself a few weeks ago. I have a pretty basic spreadsheet that calculates my monthly income flow. I just input our base pay, and I have set it up to deduct everything that is deducted from our checks (FSA’s, taxes, medical and dental etc…) This leaves me with exactly what we take home each month. Then I allocate that to each of our budget items. Doing this this way allows me to easily create my dream budget, I can quickly change my income to include a raise and see how much we would have or to include a cut in hours to see if we could still make it. But most recently I split out my own pay into two categories. The first being what a school teacher makes and the second being what I currently make above that. My dream job would be to be a school teacher, but right now that only pays about 70% of what I currently make. Since we have so many bills, I couldn’t cenceivably switch jobs today. However, by splitting out my pay like this, I was able to see that all our bils that can get paid off (car loans, emergency fund, student loans) are currently covered by my “extra” money and once these are gone, we could easily live off my husband’s pay and a school teacher’s pay. Now this has helped us really work towards this goal, just seeing in black and white that it is possible, makes the sacrifice so worth it. We have a plan to pay all these bills off in 5 years, and if we can stick to that plan, then hopefully by the end of that time, I will meet my dream of being a school teacher as well.

  4. I hate to burst anyone’s bubble, but once you are out of debt things really won’t change that much (unless your debt payments are really astronomical or you get huge raises).

    Instead of paying off debt, you will be fully funding retirement (Roth payment for 2 $833.33), saving for new cars ($500), and possibly funding your kids college accounts. And if there is anything left over you should be paying your mortgage off.

    While I’m a huge proponent of paying off debt (Dave Ramsay really has a point about financial peace), I’m somewhat disappointed in the reality of being debt free but the mortgage. Despite the fact that our income is in the 6 figures, the amount we are spending is the same as it was when we were in debt and made less! The one exception is that we are taking vacations now! We’ve followed all the advice – our mortgage utilities is ~25% of take home pay, we save 15% for retirement etc. We are only saving 1/2 what we should for the kids college and we’re not currently paying down the mortgage.

    We’ve considered going to a superstrict budget (i.e. really cutting everything to the bare bones), but that would only give us another $200-$300 a month (and it makes life feel difficult – i.e. shopping on $400 for a family of four and not having any miscellaneous money).

    Am I the only one out there that feels like this? Our current level is certainly sustainable, I just somehow believed that once we were out of debt we’d be able to … eat out a little more often or increase the clothing budget or SOMETHING. The only thing that changed is that we budget $150 per month to vacation.

  5. That’s a great visual aid. When it comes to money we don’t always “see” what’s really going on and because of that we also lose the ability to project what could happen if…

    I totally agree on that the reason why people don’t like having a budget. It’s a mathematical illustration that outgo may be exceeding income. In a world of credit, it’s often easy to pretend that isn’t happening.

  6. @Laurie,

    Being out of debt myself, I know what you mean. The immediate gratification isn’t really there, but neither is the stress. So when you DO take a vacation, it isn’t bittersweet. You aren’t digging the debt hole any deeper. You can enjoy the time with your family and not resent the debt it is compounding.

  7. I sometimes do this with a fantasy leveraging scheme where I say invest a HE loan of 4.99% into Lending Club and see how much the difference in income is over x amount of years. I am not brave enough to bet the house on a scheme like that yet. I wonder if people do borrow at 5% to make a chance of 10%, though.

  8. Thanks FD, for the mention. I appreciate it very much! 😀

    To Laurie: You say nothing really changes but I would have to respectfully disagree. There is a difference between using your money to continuously pay for debt and using your money to save for your future. I would also like to point out that once you pay off your mortgage that’s when you will see the difference. The dream budget asks you to budget as if you had no debt at all, which includes the mortgage.

    As for me I will be debt free (except the house) within the next couple of months and I will be very happy to be using our money to save for our future instead of paying interest.

  9. I have to say the difference between having debts – and being debt free is amazing. When you don’t have the debts to pay every month all that money can go to savings, and it adds up quick! We became debt free a couple of years ago, and since then we’ve been able to save up 8 months of expenses in savings. Now we’re embarking on saving even more in our retirement accounts, and paying any extra towards our mortgage.

    The difference for me between before and now Laurie – is that instead of paying banks/credit card companies – I’m paying myself. That’s much more rewarding to see the positive numbers in the accounts every month instead of the debt balances.

    Are we still allocating ever dollar to come up with a zero sum every month? Yup. But now instead of just disappearing it is growing and compounding for our benefit!

  10. Inspirational post! I think it’s wise to know the next step for your money once debt is eliminated. As you say, this can be quite motivating. For example, if you’re following a plan like Dave’s Baby Steps or the Crown Money Map, you can determine your next step. Yes, the money may be quickly allocated to the next goal such as completing emergency savings, but as Bible Money Matters mentions above, you’re now paying yourself. No more slavery!

  11. @Laurie: You’re right about how a person’s standard of living won’t necessarily change visibly right away. Sure, you get more bang for the buck when you don’t have to pay interest when, say, buying a car. But even over a lifetime this doesn’t add up to an order of magnitude change. It’s not going to move a person out of a middle-class lifestyle and onto a Lear jet. Also, debt freedom is not the same as being independently wealthy.

    When a person kills debt and starts saving, his or her cash flow gets redirected. There’s still a monthly car payment, but instead of going to a bank or dealership the money gets put into car savings. From a cash flow perspective it’s the same since the money isn’t available for other things. So, on a day-to-day basis, a person’s standard of living won’t change. If anything, a person’s apparent standard of living will drop since he or she isn’t driving a new car every three years. Someone who buys on credit can have that new car, or new clothing, or more gadgets since people really do spend more when they use plastic.

    What debt-free living does offer is flexibility and the ability to adapt in case of emergency. Everyone who reads this blog desires such flexibility and security.

    Anyone who’s locked into a car loan or a mortgage knows that the monthly payment is not optional and that there are severe long-term consequences to missing even one payment. So if a person’s inbound cash flow takes a hit due to illness or job loss (and such things do happen), or if there’s a sudden need for money due to an emergency, a person who has to make payments doesn’t have the option of cutting your outbound cash flow to match a change in income. The person whose payments are optional can roll with the punches. Also, if there’s a need to dip into cash reserves or even savings, the debt-free person most likely has more money available. This is a form of self-provided financial security.

    Not everyone believes that the flexibility and security that comes from debt freedom has value. Many believe that credit offers more flexibility and greater security.

  12. Laurie and Squeaky, you are so right! Being debt-free does provide a bit of freedom and a lot of security, but you will not “live like no one else” in the sense that you can do/ buy anything you want (private jet); and people should not expect that unless they start a business with the free-up cash or make other big changes. I joke sometimes that I always feel poor. Objectively, I’m not. I am completely debt-free (paid off my mortgage 8 years ago), but with saving for retirement, college, etc. there is always a restraint on spending. I think it is the self-discipline debt-free people have that compels them to save so much. We do spend more freely now that we have no debt, but we never go out and spend all our money just because we have no payments to make. The key, I think (going back to the book “Your Money or Your Life”) is finding the point of “having enough,” so you can enjoy your money and still save for new goals, such as early retirement.

  13. Laurie – it sounds like you might just need to adjust some things in your budget. I have much higher housing expenses and also max out our roths but find we have money to go out to eat. One thing is that I’m saving a lot less for new cars. We try to only spend around 5k for used but reliable cars. I’d rather drive an old car and get to go out more than visa versa. With total housing only at 25% of take home you should have some wiggle room with what you spend.

  14. I think the biggest motivator for me to reduce debt is the simple fact that reducing debt creates TIME.
    Time to sew, to create, to write, to dream, to volunteer, to garden, to experiment and experience.
    Thanks for a great post and a wonderful reminder that frugality pays in time as well as money!

  15. @IndianaTeacher

    >I think it is the self-discipline debt-free people have that compels them to save so much.

    Very well said.

    Maybe practice makes perfect when it comes to living below one’s means. If so, it would explain why people accustomed to saving and budgeting tend to do better with windfalls. We’ve all heard the stereotype of the lottery winners who spend their jackpot and who end up in an even deeper hole a few years down the line.

  16. I’m with Laurie. I’m always amazed at the idea that once you get out of debt, you will “build wealth” “become rich” etc.

    We have never carried much “debt”, and have had only a 15-year mortgage for the past 7 years. We buy cars with cash, pay off our credit in full each month, and save more than 40% of our after tax income. We also pay an extra $600 per month on top of our $888 mortgage. Still, we budget every penny, and do without many things that we would like to have (vacations that aren’t visiting relatives, for example).

    We have maxed out work-based retirement plan contributions (what is now 401k, but had several names before that) for 16 years. 16 years – and folks, it is still not very much money. We have also maxed Roths for 10 years – and they are worth less than our contributions.

    If we budget carefully and do without for the next 20 years, we have a slight chance of having just enough in retirement accounts to meet our basic living and medical needs. “Rich” is not a possibility. And “dreams” have been put aside as childish.

  17. I have enjoyed reading the many different viewpoints from everyone. While I think some people seem to be missing the point of the dream budget I think it boils down to this. One reaction is that of hope, and the other is that of hopelessness. It reminds me of the half-full, half-empty example. You’re happier if your glass is half-full (debt free), and disappointed when the glass is half-empty(you don’t have more to spend). Our attitude about anything shapes our actions. My glass is half-full regardless of how many others might try to convince me that it is half-empty. 😀

  18. I’m sorry for coming across as a whiner (though I do feel somewhat whiny). 🙂

    I really didn’t do a good job of pointing out that it isn’t the case that we never eat out or that things are super tight – they aren’t. We budget for entertainment and eating out on a monthly basis. I spend a lot of money on mhy kids education. What I’m really surprised at is that we DON’T have the money to pay down the mortgage if we’re saving like we should. We’re currently shoveling Roth $833, cars $500, college $350 sinking funds ~$800 into savings every month. There is certainly money there – it just seems like we have to save it all!

    Interestingly, I know in my heart that if we had a sudden windfall, I’d plump up the kids college funds, add another 3 months emergency fund and possibly fill the car funds … and we might go out for a nice dinner. Perhaps the problem is really me!

    I do have to add that before kids we were a two income family (I also was making just at 6 figures) so I think I’ve also been very spoiled by the days where spending on a lavish vacations and eating out at will were common place. Doesn’t it always feel like a punishment when you have to cut back?!? Even though I’m really perfectly happy with the way that things are, it still seems like (my choice to stop working and stay home) is also in some ways a little bit of a punishment!

    Sometimes I think that just knowing so much about the budget (I’m the nerd in our family) keeps me from *enjoying* the fruits of spending any money. Guess that is a good thing most of the time!

  19. Nice way of highlighting just how costly debt is to a family. I’ll be doing this one with wife and son. I can explain why debt is bad until I’m blue in the face, but illustrating exactly what they are doing without would really hit home.

  20. Laurie, you absolutely did not come across as a “whiner.” It was so refreshing to have someone express what I have often felt. With $5000 Roth IRA contributions, 403b, college, and other savings (about 30-35% of our income every year), I just never really feel flush. Yet that’s alright since the only way to feel flush would mean not to save, and that would be unacceptable to me. Of course, you can’t have a budget so tight that there is no money for fun. Like Laurie, we enjoy eating out, going to shows, and we travel; however, we budget for everything and pay cash. And Squeaky, definitely living below one’s means is a habit that needs to be cultivated.

  21. Laurie,
    You make some interesting points, and I think the commenters who have already responded have done a good job as well.

    We also went from two very good incomes to one very good income. Fortunately for us, though, my wife always knew she wanted to stay home when we had kids, at least while they’re young, she was a better financial planner than I was (at the time), and so she never let us spend one dime of her income while she was working. Not only did we not spend any of hers, but we saved a healthy chunk of mine as well.

    For five years we put all that money into plain vanilla CD’s so that when we finally had kids, settled down, and bought a house we could make a 75% down payment.

    I realize that not everyone is fortunate to be in a situation to live like this, but I also know that there are A TON of educated young people who are, and choose not to.

    The benefits to this plan are three-fold, in my opinion. The first is that you never get unnecessarily accustomed to a lifestyle that you will eventually have to cut back on. The second is that it takes serious advantage of the time value of money. The third (an extension of the second) is that by “buying down” your mortgage so significantly, it frees up alot of cash right away for savings, yes, but also plenty of fun stuff.

    We have more free spending money now than we did when we had two incomes and were earning more.

    This is a hard path to follow initially, and if it had been my choice I wouldn’t have been forward thinking enough to do it. So I have only my wife to thank for this one, and her very sensible and frugal parents for their example.

    The only thing that stood out in your posts, Laurie, was you mentioned spending alot of money on your kids’ education. I’m assuming this is in addition to college savings, and you’re referring to private school tuition. I can’t pretend to know anything about your situation, but I know those bills would be somewhat of a game changer for us. When we were house hunting, the first criteria we searched by was the public school district we were comfortable with.

  22. Great idea. I’d suggest everyone immediately diverts their debt repayments to long-term stock market investments though, even in their fantasies.

    But then I am rather obsessed like that! 😉

  23. Several people have mentioned being let down when they are debt free-that it wasn’t the excitement they had anticipated. I would suggest that being debt free (or being wealthy) is a hollow existence without your dreams attached. If your money (or lack of debt) is not bringing you your heart pounding wishes and dreams then it is time to take a look at what you really, really want in life. Don’t be on your death bed thinking back on paying off Citibank. Think, with a smile,about the glorious sites you’ve seen, the people whose lives you touched, the joy you found. …that’s what it’s all about.
    Many blessings.