Tell me if this sounds familiar…
you get through the summer in bikinis and loose-fit dresses, swap them for leggings in fall, and then one day early winter (right after Thanksgiving) you try your winter pants on, only to find out that they wouldn’t fit.
I’ve definitely been there, blaming the slow creep of extra pounds when you dont watch them.
there is a reason why we need to step on the scales periodically, and there is a reason why you need to count those calories if you are trying to lose weight.
and the reason is to keep ourselves honest on how we are doing, and by keeping honest, avoid eating this chocolate croissant which is so crunchy, so buttery, and calls for you from the shelf.
So, that brings me to the BUDGETING. which is an equivalent of counting calories if you want to be financially fit. the reasons why you need a budget are simple:
- knowledge is power. and you need to know where your money is going
- you don’t want to work until you are 86, no? (expected life these days)
- doesn’t matter where you are on the line of financial continuum (broke / paycheck-to-paycheck / stable / bloody rich), a budget will help you visualize your financial future, crafting a plan how to get out of debts, or how not to piss away your fortunes if you happened to come about to some money
Create your budget – step by step
- Create a table with projected monthly Income, Savings and Expenses. I like to have Savings as a category before Expenses, because sending money to your saving/investment account should come automatically, before even you had a chance to spend it all on something stupid.
- Get your actual monthly expenses all in one place. You can get bunch of apps who do that, such as Mint, or Personal Capital, or you can do it old-school like i do with Excel/ Google sheets. Download your transactions from your bank/credit cards etc.
- Organize your actual transactions by categories. Mint would do it automatically, even though they tend to crew things up and put big chunk of your expenses into “uncategorized” which is not helpful. Again, i do it myself, yes, its my nerdy fun.
- Compare your actuals vs your budget, if you’ve been a good girl/boy and spent less than projected, good for you, go get an ice-cream.
- If you spent more than you should have, analyze in detail which categories you screwed up with. For example, later in this post, i’ll show you what actions i took as a result of exceeding my budget (massively so!) on silly things.
Few important things about the sample budget above:
- your Income is after all deductions such as taxes, health insurance and 401K- i assume here that you are contributing to 401K to the max ($19,500 max for 2020). if you dont, please drop everything and just go sign up to 401K. Even if your employer is not matching the savings, it still makes massive sense to max out on 401k so you dont pay more taxes than needed.
- If you are self-employed, please put here projected Income after taxes, and after the retirement contributions you do to your IRA
- Most personal finance gurus advocate for 50/30/20 rule – which is, out of your income: 50% for essential expenses / 30% non-essential expenses / 20% savings
Now, to keep yourself honest about the savings, i would open separate savings accounts for:
- Investing/long term savings. Set up an automatic recurring contribution from every paycheck
- Savings account for “Big items” – your wedding / car / vacation in Japan / house renovation etc. Contribute to this account any time you got some extra income, or any time you actually spent less than the budget
- College fund – if you have kids, you should start one. they provide tax advantages and again, good way of making sure you don’t trade your kids future on some impulse shopping today.
Now, all of this is a bit theoretical, let me share with you my actual budget for July in Spain. Its a weird one, as at least in the beginning, i am not going to have any income in Spain, and hence cant save. Once my life in Spain gets to more normal rhythm, i’ll share the full budget.
Conclusions for July:
- overall spent less than planned, but that’s only because we were living in our summer place, hence didn’t pay rent for the primary residence
- “Work” category contains tons of some magazine subscriptions which i didnt event know i had – so i spent one afternoon calling to these newspapers and magazines to cancel – next month should be much less.
- “entertainment” same – turns out i was paying some some Apple Apps which i never used, and signed up long time ago as “trials”! canned these.
- Shopping – bloody hell. i felt all month that I’m not buying anything at all, only this little thing here, that little thing there. It adds up, and worse of all, i really didn’t need any of these things i was buying (the jury is still out on special potty-training underwear, sorry for details)
- I cant wait until the end of August to see how I’m doing since i adjusted few of my silly spending habits!
Finally, i enjoy doing the budgets. Yes, really!
If you want to, send me a note, talk to me, i’ll help you (for free) to put together a personalized budget for you, and will help you to analyze it to see how you can shave off expenses and save for the bright financial future.