Wednesday, March 5, 2008

A Monthly Budget Is Essential

I cannot emphasize enough how important establishing a monthly budget is when one is building one's financial framework. Simply by tracking every penny of income and expenditure you become aware of how much you are spending - and on what - every day. This has been revelatory for me. Seeing the numbers makes me conscious of every purchase and expense, and that alone has modified my overspending habits. I am now living well below my means, yet ironically I feel as if I have received a big raise because I am now saving a big percentage of my income with no decrease in my quality of life (indeed on the whole it's been a very positive experience emotionally and I've never felt better about my current situation and the future). You can click on the image below to check out my February budget (if anyone's interested I can email you the Excel file. It's a simple spreadsheet but works well for me so far).

Green boxes represent either income or money saved. Red boxes are expenditures, blue is the amount budgeted, and then the balance appears in the yellow row below. In January I created a budget but I failed to track every purchase. I had an ATM Withdrawals column, thinking that as long as I kept track of money going out I would be fine, but I never knew exactly how much cash I was spending, or on what (and I'm sure a good deal of it was discretionary spending with zero utility). A friend recommended that I make sure to keep track of every purchase, which I did in February. At times this can be a pain, but for the most part my purchases were electronic, which makes it easy to track. For cash purchases I'd usually have a receipt, although to save paper sometimes I'll just text myself the amount to enter later. It takes a modicum of effort for great return. It's essential to know exactly how you spend. I imagine that once I've established good habits that this will become less important, but that won't be for some time.

The comment feature in Excel is nice because I know exactly what each expense and irregular income was. I had a fair bit of income in addition to my bimonthly paycheck - a couple expense checks from work that I had due and some minor referral and new account bonuses over at ING and Revolution Money Exchange. Now aside from simply tracking all ingoing and outgoing money, the purpose of the budget is to help me allocate reasonable funds to each part of my financial life. This is the tricky part, and for February I sort of winged it based on some January numbers. These numbers will likely change as I discover what works and seems reasonable for a month. One thing that I did change for March is to break down the categories more specifically. For instance, Groceries and Dining Out take the place of one Food category - I think this makes more sense. Miscellaneous was far too broad for me (casual beer/wine purchases, toothpaste, and cab fare seem too qualitatively different to be placed in the same category) so I broke it up into Personal/Health, Entertainment/Luxury (i.e. booze), and Miscellaneous.

You'll also see the two yellow boxes at the bottom which contain some valuable info. The first is a percentage breakdown of what I have budgeted for a standard month in which my income is just two paychecks. I can see what percentage of my budget I have allocated to each category. I have a solid 15.10% of my income going directly to savings/retirement, for instance. This is a great start for automatic wealth-building. Anything beyond that is great - and I more than doubled that in February. The next grid shows the % breakdown of my actual income for the month. This one is a bit screwy (I somehow spent more than I had) because I had some money in my checking account from January's surplus that I didn't account for as income. I think I will do this moving forward to make sure the numbers are accurate. A few more key points:
  • Slightly over budget in Rent/Utilities because I hadn't taken my $30/mo. cell phone expense into account and we had a ridiculous electric bill. Hopefully this will be the peak, and our Comcast bill will also be slightly reduced moving forward.
  • I was $143.49 under budget for Food. I think I overbudgeted here, but I also only bought lunch once during the month. Definitely a big money-saver. I also didn't eat dinner out much, or at expensive places.
  • Went over budget in Misc. by $139.58. This included $67.29 worth of business expenses for which I was reimbursed and $57.29 worth of Obama campaign contributions and a T-shirt purchase that I hadn't anticipated. Pretty much right on target other than those big expenses.
  • The big plus here is in the Saving/Retirement column - $366.60 over the $300 I had budgeted! This is mainly due to the January end-of-month surplus and additional income, but also because I was able to maintain some discipline in my spending for the month.
  • I can already see some areas where I can save more, especially with casual alcohol purchases. Although I know that the odd six-pack or bottle of wine purchases felt fewer than previous months, nevertheless those $7.99 and $9.29 purchases add up. I hope to save more through sobriety in the coming months.
On the whole I feel like I've made great progress and I look forward to my new budget for March to help me optimize my spending/saving balance.

1 comment:

Andy said...

Well organized - I like it. Great blog as well. Adding to my list or reading.