2008-03-17

How We Try To Control Our Expenses Without Much Of A Budget

Our annual budget would have a lot of dust on it, were it not for the fact that it exists only in electronic form. It’s on an Excel spreadsheet that’s an evolution of the first one we ever did, maybe five or six years ago. Every now and again, we update or add categories of expenses. But we really don’t look at it all that often.

In particular, we don’t use our budget to set targets or goals for our expenses. So we’re never looking at our expenses in terms of actual versus budgeted—or using words like “variance.”

Knowing that, I sometimes start to worry that we’re not doing enough to watch our expenses. This has been exacerbated by my growing habit of reading personal-finance blogs. Quite a few seem to have the word “frugal” in the title or as one of their primary categories discussion! And of course, I know on some subconscious level that it sure feels like we do take-out from restaurants a lot.

So I decided to take a look. I ran a report in our Quicken software (through which we track most of our expenses). I pored through it, feeling confident I would be surprised and disgusted to see the annual totals for “restaurant” or some other categories.

But I wasn’t.

Don’t get me wrong. There’s plenty of room to cut down what we spend at restaurants. But even if we slashed that a lot, it wouldn’t really result in that much extra money. If we saved and invested all of it, it wouldn’t really be much uptick from what we are already saving and investing. I pretty much concluded that our spending was okay—no gold stars, nothing special, but okay. Pretty much in check.

Is that because we are naturally thrifty? Or because we have painstakingly trained ourselves to be frugal by instinct? Highly doubtful.

We do, however, practice the art of self-deception in our personal finance. That means we trick ourselves into thinking that we make and have less money than we do. As I look back at how I felt about our personal finance through the last year, I remember feeling money was tight. I remember several different months in which our credit card bills seemed ginormous. I remember having to shuffle money around to get enough into our checking account to cover those credit card bills. I remember feeling like I was raiding our savings— and that we weren’t saving as much as usual. All those feelings translated, I’m sure, to our tightening our belts here and there. So for us, this works pretty well.

This is how we do it:

  • We have a fairly aggressive plan of automatic saving and investing. That’s where we’ve set it up so certain amounts of money get deducted from our checking account each month and get funneled immediately into pre-set investments. So we sort of never see that money, and it never feels like it’s in our pockets.
  • We reserve each month for major expenses. Essentially, we total up a handful of our largest expenses that tend to hit in one or two big payments. For us, that’s mostly property taxes and insurance (our homeowner’s, auto, and umbrella coverage is all with one company). We divide the total by 12, and that’s how much we set aside each month. We actually move this money out manually each month, but lots of banks allow you to do this automatically too. Again, we sort of never see that money, and it never feels like it’s in our pockets.
  • After taking care of the first two items, we pay ourselves a “salary” each month. And though it wasn’t some grand master plan, we’ve set that salary a little too low. We haven’t raised it sufficiently, given what’s going on in our lives (particularly with the kids). This contributes to money feeling tight.

After taking care of everything above, anything that’s left goes into a high-yield savings account. That accumulates and is available for further investment. Psychologically, that’s what I think of as what we’re saving. And I feel bad when I have to dip into that to pay our bills in any given month. Conversely, I feel good when I’m not dipping into it, and it starts to add up—and we put it into other investments.

Managing expenses is personal. There are far too many individual habits, emotions, and circumstances that go into spending. There can never be “one-size-fits-all.”

You may decide you want or need to budget for spending more proactively than what we do. After writing most of this post, I tried to check out some of the existing blog discussion on budgeting—and found that the Money Blog Network picked budgeting as its topic for this past February. I thought that No Credit Needed’s post (and links to its past posts) and Get Rich Slowly’s post (which includes a form of spreadsheet) had really practical advice on the whys and hows of budgeting; and I found a link to an earlier post on Free Money Finance that’s also great for explaining how to do a budget.

I was also quite interested that Free Money Finance reported that it was not going to do a budget for 2008—and that Five Cent Nickel’s practice of “reverse budgeting” is, like ours, fairly gentle on the time spent checking expenses.

So maybe there’s something to be said about starting the practice of budgeting just to get yourself on a particular path—after which you may not need it so much.

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