Tuesday, January 4, 2011

How I Manage My Budget

I started tracking every penny I spent in April 2009. I didn't use any fancy software to do this. I just created an Excel database and have a tab for my checking account and each of my credit cards. I keep track of my balance and estimate purchases or charges for the year so that I can track whether my income will cover my future bills.

When I started saving and contributing to my Roth IRA in earnest, I added these future contributions to my estimates to make sure I knew how much I'd really be able to save. When I did this I started to wonder why I hadn't been saving before. If my income and expenses left room to contribute to savings, why didn't I already have a lump of money sitting there at my disposal? The obvious answer is I'd spent it.

I decided another column needed to be added to my spreadsheet - a spending category column. I created a bunch of category names. The Comcast and T-Mobile bill were easy - I named them Cable and Phone. The amount I spent on these each month was fixed, so I already knew my extra money wasn't going down the tube there. It was the categories like Gas, Groceries, Coffee and Travel that I had lumped together in my spreadsheet as an estimated miscellaneous charge every month, but that I was obviously overspending on. When I added all of these charges up for the past year I was shocked by how much more than my estimate I was really spending.

My first problem is that I over estimated how much my miscellaneous spending could really cover. I didn't worry about how much I spent when meeting a friend for happy hour or coffee because it wasn't something I did often. Or a new pair of Paige Jeans? No biggie, I hadn't bought clothes in awhile. I assumed that some months I was going to go over my miscellaneous budget, and other months I'd be under and that it would all even out in the end. I didn't track any of this spending, and I didn't set limits on any of it.

I decided that I needed to take a serious look at my miscellaneous spending, figure out a realistic number for all the miscellaneous things I needed throughout the year, and then start tracking those purchases monthly so that I'd know how much I could continue to spend. My miscellaneous budget broke down like this:

  • Gas
  • Groceries
  • Coffee
  • Drugstore
  • Clothing
  • Travel
  • Presents (birthdays, Christmas, Mother's & Father's Day for my family)
  • Miscellaneous 
The Miscellaneous Category was to include things like dinners out, pet store purchases (because the cat's got to eat too!) and trips to Ben Franklin. It's a little broad, but on everything else I could estimate a pretty accurate figure. On the things that I couldn't I lumped them all into Miscellaneous, took a look at my savings goals, and allotted an amount I am allowed to spend on miscellaneous items each month that allowed me to meet those savings goals. Everything in Miscellaneous (other than feeding the cat) is non-essential. If I can't keep my purchases within my alloted limit, then I can't buy it.

At least that's the theory :) I started tracking each of these categories every month to make sure that I met my goals. On most of them I did. On a few I saved a few dollars, and on some I overspent. It made me take a closer look at my grocery shopping habits, which were pretty easy to get under control. As you might have guessed, the miscellaneous category has been the hardest to keep under budget. But I think the longer that I track it the more I'll get it into my head that I can't just spend money on anything I want. If I do that, it really won't all balance out. And if I overspend one month, then the next month I'll have to do without.

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