Friday, April 01, 2016

How I got My Finances in Order Part 3: Where does your money go?


What is a Budget?


Many people misunderstood the term budget, like they misunderstand the word diet. Your budget is simply all your income and expenses, like your diet is the food and drink  you consume.  Neither are inherently about restriction. All my life I've had a budget.  All those years, as I pilled up debt, I had a budget. I just had no idea what that budget said about me or the way I handled money.

You Don't Know Where your Money Goes


Throughout most of my adult life I have made enough money. Enough money being defined as a roof over my head, food in my belly, and enough to have some left over each month.  If you are like me, you are making  enough money. Despite that my debt kept building. Sometimes slowly, sometimes in leaps and bounds. I'd think vaguely about money. I would calculate that I could spend so much on a car payment, because I made enough money, but it never actually included how much money I actually spent. If I needed a small thing like a pair of shoes I would just whip out a credit card and buy it because I made enough money. 



Finding Out Where Our Money Goes


We need to know were all our money goes, every bit of it. For three months we are going to record every expense.  During this period don't try and change your spending habit. The funny thing is, the mere act of recording what you purchase will change our behavior.  You might be able to construct the last three months if you have comprehensive records of your spending. You credit card site(s) should have everything you've used them on. Your bank will have records of all checks or online bill pay. The only problem would be cash. I want everything. So if you can't account for even a candy bar you will need to do so from here on out. 

I do recommend looking back at your expenses to get a general view of what you are spending. If you are average for the US, probably most of your purchasing is on credit cards.  This will help you deal with the bias that recording your expenses will produce.


Record everything. Make sure you account for every short trip to the grocery store, every candy bar from the gas station. Seriously record everything. Every cash purchase. That coffee you bought with change found in the cup holder on your car needs to be recorded. I said record everything.  Even that five dollars you gave a friend.  


If you don't record everything you will just be lying to yourself and you will make this harder than it needs to be.  You will be like all those people who are on diets but don't record their caramel frappo calorie filled thing because it's a drink and liquids don't have calories. Or those who say that free food at the office doesn't count and then wonder why they don't lose weight. 


There are several things you will need to record about your expenses.  Record the date of the expense, the mode(credit card, cash, check account etc..), the payee, and divide your expenses into various categories.  The categories are important to judging where you spend your money. I divide my expenses into the large number of categories.  For example, I have eating out broken down in to restaurants, fast food, and coffee shops.


The final thing you need to keep track of are long term costs.  These are large costs that occur periodically for which you need to budget. These include known costs such as your car insurance every six or three months. The best way to deal with these expenses is to pro-rate them over every month. Your insurance payment may not fall into the three months you are recording all your expenses so include the per month amount for that. What I am saying is if your insurance payment is 600 every 6 months put 100 dollars into each months expenses. 


You also need to budget for unexpected costs like car repair or medical expenses. It can be hard to estimate what these things can cost but you should put aside money for an emergency fund.



Tools


I have tried a few tools to keep track of my budget. For a year I used a notebook and colored markers.  I put a legend across the top of: date, amount, place, amount. I used a different color marker for each category. This made it easier to add everything up at the end of the month. I remember many a time sitting on my living room floor surrounded by all the receipts from the previous month entering everything into the notebook and then adding it up.


There are many available budget spreadsheets. These usually already have all the formulas set up with categories.  These will add up everything and make them work out in the end. I never managed to use one of these for more than a few days. I don't know why but I just never found spreadsheets a sustainable method of budgeting.


YNAB(You Need a Budget) is a very popular budget tool.  It has a fee to use but offers a free month so you can try it out. You put in all your accounts. It connects to you banks and credit cards automatically bringing in that info. It includes a whole system for thinking about money and how to track things. Many people swear by YNAB so I recommend you try it out for at least the free month. I just could not get into it. 


The tool I did find easily understandable, and the tool I use to this day, is mint.com. Mint is a free web service and they have really good apps for tablets and phones. Similar to YNAB you give it access to all your bank and credit accounts. You can even put in your loans such as car loans mortgages etc. Mint does a really good job of keeping track of everything. It produces a bunch of useful reports. You can check on all your debts, see graphs of were all your spending is going, etc.


What I like best is how Mint handles budgeting. Click on the budget tab and look at the bottom and you find a drop down arrow that says "everything else". Every expense will be shown here by category. Mint automatically assigns categories to expenses if it knows them. You can then click the little plus sign next to each expense. This brings up the create budget box. It will auto populate with what Mint thinks is the amount you have used over the last several months.  So set up budgets for all you expenses. Keep clicking on that "everything else" until you have every expense in a budget. Also add long term expenses to the budget, such as insurance payments.  For certain unexpected expenses such as auto repairs you can set up roll over budgets where the amounts add  up.  For example I put twenty dollars every month into the auto repair budget. This gets used for oil changes or unexpected repairs.



Own Your Stupidity


After you have a few months of expenditures cataloged, you need to take really long look at what's there. Gaze upon the amounts you have spent. Look at that massive amount of money you spent on eating out. Behold how much you have wasted at that franchise coffee store. This is what happens when you don't think about money. This is what happens when you are stupid. What I want you to do right here is to own your stupidity. Bath in your idiocy. Open yourself up to how much money you have wasted.  Don't flinch, Don't turn away. This is what you have done because you are stupid person. Feel shame. Shame is good, when you deserve it. You are not going to be that person anymore. In our next installment I am going to explain how I, and hopefully you, can get out of this mess we've made.

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