Spending and Saving Questions are Answered by Our Budget

by Kevin on November 5, 2008

I hear a lot of people complaining that budgets don’t work. They’re too hard. They’re too complicated. It sounds like a lot of work. I’ll be fine on my own.

I also read stuff like why you don’t want a budget. While I generally agree with the sentiment behind this post — learning to live simply — I definitely think everyone needs a budget.

Step #1 of my No Debt Plan is creating a budget. Creating a budget helped my wife and I stop living paycheck-to-paycheck. It truly changed our financial lives. As you might expect that has made me quite the fan of budgets.

Why Budgeting Makes Spending and Saving Easier

Budgeting is part of a larger financial plan. Like a house, if well constructed it can serve you for a long time.

Budgeting makes you analyze your current spending and saving

Our budget is setup to take care of all of our financial needs like spending money on groceries, insurance, and our mortgage. Setting up our budget initially forced us to look at our monthly expenses. Where were we spending money? Were we comfortable with $X being spent on groceries? Why are we spending $Y eating out every month? Doesn’t that seem like a lot?

We had a good estimate of what our income would be each month. It’s simple math. You come up with your expenses for the month and subtract them from your income. You end up with what I call free cash flow (FCF). FCF is essentially the money that is left at the end of the month that can be used to putting extra money into savings, investing, or paying off debt (and not necessarily in that order!).

So we analyzed what we were currently doing in order to raise awareness and make changes.

Budgeting helps you line up achievable goals

If you know how much money you have left at the end of the month, you can set reasonable and achievable financial goals. In debt and want out? Divide your total debt amount by how much money you think you’ll have left over each month. The result is the number of months it will take you to get out of debt.

Same thing for saving. Want to save for a downpayment on a house? Divide how much you think you need by how much you can save each month. The result is the number of months it will take you to get there.

An Example of How Budgeting Made a Tough Decision Easy

We pulled in a lot of extra income in October. I’m not boasting, it’s just a fact. I don’t give details of our income because I have family and friends that read this blog. But in general terms, we had a lot of income we don’t normally expect on a monthly basis come in. I work in a base plus commission job and the commission was really high this month. I doubt the high commissions will continue to be this high moving into the future, but I’ll take it while it lasts. I also got a bonus from having a great 3rd Quarter.

So we covered all of our regular expenses and set aside our normal savings amounts for our current goals. We still had money left over. (This is a very good thing.)

There are a couple of different paths we could take at this point with or without budgeting:

  • Spend the money on something we want (HDTV anyone?)
  • Not track what happens to the money and end up spending it over time on stuff we want
  • Save the money toward our savings goals

Now it seems simple enough that we should do the third option. But the tug of “buy the TV!” type feelings is hard to resist sometimes. We did set aside some extra “fun” money for a nice night out on the town, but it was a fraction of the total. We justified this as a reward for the hard work, and I’m okay with that. Remember, life is for living.

In the end the rest of the decision was pretty easy to make. The money would go toward our highest priority savings goal — saving for a new used car for the future.

It may seem so simple, but sometimes money is complicated. Having a budget has made these decisions a lot easier than just handling our money by the seat of our pants.

What do you think? Do you budget? Has it worked for you?

{ 2 trackbacks }

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philip November 5, 2008 at 2:33 pm

I guess you are right. I guess it is time to sit down and actually put everything down on “paper”. I had some extra expenses come up in October (all new tires on my vehicle and more stuff) but I also worked lots of overtime and was a 3 paycheck month, and yet I am not certain why I am where I was before. This month really turned into a slap in the face that I am not paying attention like I should.

Thanks for throwing this back at us here.

Steve in Denmark November 6, 2008 at 4:31 am

We’re still in the transition phase; from shutting our eyes and hoping for the best, to the wake-up call of a call from the Bank, to the doing a ‘budget’ over all our incomes and out-goings (and subsequently getting another, part-time job and taking some extra shifts!), to projecting our finances until the end of 2009, to trying to get through this month (my wife has just changed job and goes from being paid every two weeks, to monthly and November is a ‘big’ month for our out-goings), to setting a budget and financial aims, which I will do in January.

Our wake-up call from the Bank also coincided with the car needing 17,000Dkr worth of repairs, so it’s been/is tough at the moment. But the fact that I have everything in our plans and oversight, is comforting. There shouldn’t be more surprises, however I can see what I need to do at any particular point, should the unforseen happen. My (Mac ‘Numbers’ spreadsheet) plan has a section for ‘Unforseen Expenses’, after all!

I would recommend a couple of things: Look at your finances, as the article says. Then – if they’re bad – talk to someone. Talk to many people, gather ideas. Do a projection of how things are likely to go over at least the next year and talk to the bank. Get advice, get help. The worst feeling is that you’re all alone. Second (especially over here) buying a new (small) car can be better than a used one. Once we factor in how much our 10 year old used Fiat has cost the last year, and is likely to cost next year, in repair bills, petrol and the like, even with the cost of the loan to buy a new (KIA Picanto in our case) car, we save money! We save on kilometres per litre, on repair bills (none!) and (huge savings) on car tax. I have a three loan rule, so once we have a couple of my wife’s student loans paid off, we’re buying.

Russell November 6, 2008 at 1:10 pm

Something I did years ago, was carry around a little spiral book and write down EVERY expense. I used to walk to the corner gas station at breaktime for an ice cream cone or a fountain soft drink. I went out for lunch almost every day. I did this for a month, and was surprised at the percentage of money I spent just on that afternoon break.

That was a surprising exercise, and it’s a good first step towards understanding spending. I’m not very disciplined about budget, although I do budget the major expenses like mortgage, monthly household bills, investments, insurance, and maintenance for my car and motorcycles.

I do like to buy things like motorcycles, an HDTV, electronics. Fortunately I’m a shopper, I will spend months looking and comparing before I make a major purchase.

Kevin November 6, 2008 at 10:54 pm

@Philip: That’s the thing… you can’t know what is going on until you’ve sat down and looked at it. Where did the money go?

Better to tell your money where to go than it to tell you where it went.

We budget car maintenance out at $25 per month. Usually none of it is spent… every 3-6 months we do an oil change (when mileage necessitates), but the rest builds up for tires, emergencies, etc.

@Steve: You’re right about finding support with other people. I always recommend people buy a used car from anywhere from 2-4 years old. If maintained well, and if it is a quality brand, it should hold up for another 8-10 years.

@Russell: That’s why I use my credit card — to help track all of our expenses (while earning rewards).

Russell November 7, 2008 at 8:05 am

Kevin, Nowadays maybe you can use your SpeedPass or your “Blink” to buy a candy bar at the corner store. But I generally still use cash if I’m buying 2-for-$2 McMuffins for breakfast, or going out for lunch with some of the office folks. And at the time I made my spiral book (years ago) you pretty much had to use cash for that ice cream cone at the gas station. And that was where I learned maybe 6% to 9% of my money was going, into those under-$2 purchases.

Using a credit card, particularly if you use MS-Money or Quicken to categorize every purchase, is the way to go. You can get reports, charts, daily warnings, about your spending. You can even track cash spending with those programs, if you keep a record. (Collecting receipts even for the ice cream cone can be helpful.)

SingleGuyMoney November 9, 2008 at 12:33 am

Heck yeah I keep a budget. I can’t imagine handling my finances without one. I’ve managed to create a budget spreadsheet that meets my needs and it is like my financial bible!

Kevin November 11, 2008 at 10:43 pm

@Russell: Exactly. Categories are where it is at. I don’t use the automated software and haven’t been tracking spending totals (like for the year, etc.), but I am aware when we go “over category amount” during a month for something (spending more on groceries, etc.) I don’t like receipts, but AMEX and Visa give me a detailed log that is more than enough for my purposes.

@SGM: How long did it take you to come up with your budget spreadsheet? How often do you look at it / update it / etc.?

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