My first budget is now an inaccurate disaster. I created it right out of college and hadn’t really modified it in years, other than updating big line items like rent and income. Looking at it now, it doesn’t line up at all with what I am actually spending. Although it was a good starting point, I really should have taken a second look a lot sooner. Here it is:
The most glaring issue here is that I budgeted for nothing other than the essentials to keep myself housed, fed and employed. I didn’t budget any “fun money” for things like hobbies, travel, going out to eat, or even some nice flannel shirts. Something like the above is a great rough draft if you’ve never made a budget before, since when you’re starting from zero it can be hard to think of all the smaller categories that add up. As with all rough drafts though, revision and editing is an absolute necessity.
I wasn’t honest or realistic with my discretionary expenses, which meant that my budget was not accurate. I decided to fix that by taking another look at my budget today, several years into my journey to financial independence.
To refine your budget, start with what you actually spend
In order to make a better budget I decided to set my starting point using my actual spending from the past 6 months (January through June 2019). I’ve been using Personal Capital for a couple years so I already have all my financial data aggregated there. I scrolled through over 400 transactions which occurred during those 6 months and made sure each was categorized correctly. If you’re not already using a similar aggregator service, you can manually gather the data from credit card and bank statements. I then averaged my spending in each category and ended up with the following:
Oops… I actually spent over $800 more per month on average than my first budget would suggest. Thankfully I also made about $400 more per month on average than I had budgeted for due to recently receiving a raise, which helped offset some of the damage. I cleaned things up a bit here by condensing some of the categories; I consolidated all car-related expenses under “Car” instead of having my car payment, gas, insurance, maintenance, and tolls as five separate line items. You can insert a comment to the cell to keep track of the individual values which comprise the sum, so they don’t get lost for ease of updating in the future.
Committing to cut spending where you can
Now that we’ve got a realistic budget based on my actual spending habits, I can take a look at where I can make cuts to save some extra money. Reviewing each and every expense, one at a time is really the best way to go here. Let’s go line by line to find that fluff (I bolded the top 3 offenders):
Rent/Utilities: We live in a fairly high cost of living area, so expensive rent is just a fact of life here. What we’re paying is on-par with comparable apartments. Short of moving to a different state, there isn’t much we can do here.
Car: I’m bleeding money. Seriously, all-in I’m paying nearly as much to own and operate my car as I’m paying for my apartment. The main culprit is a $523 monthly car payment, thankfully at 0% interest with only a year of payments remaining. I am still paying for my past financial mistakes here, as I made a series of poor financial decisions related to car ownership several years ago.
It’s a long story and definitely deserving of its own post in the near future. (Update: read all about my past financial folly with cars!) Once I get rid of that payment it will free up $6,000 per year in cash flow, and I’m hoping to drive the car for at least another 5 years beyond that.
Groceries: Not a concern of mine right now, we don’t throw too much food away. I’d rather spend a bit more on groceries than eating out more frequently since your money goes much further here.
Travel: I actually took the cost of my share of our Costa Rica trip in March and divided it over 12 months instead of 6 months like the other categories, simply because we only do a trip like that once per year and I didn’t want it distorting the budget. I’m fine spending $200/month on travel at this point, although we did spend nothing here for a few years after college.
Online Shopping: Wow. I should have just called this category “Amazon,” since that’s what accounted for nearly all the spending in this category. I scrolled through my recent orders and although I have bought some essentials like shampoo and body wash at good prices, a large portion of my spending appears to be junk that I really could have gone without. My Prime membership just ran out and I will definitely not renew it after seeing this.
Clothing/Shoes: I bought new sneakers, hiking shoes, work boots, and snow boots all at once since most of my shoes were on their last legs. I also got four new flannels on sale from LL Bean! I spent a little bit more to get stuff that will last for years, so I don’t foresee myself spending too much on clothing in the near future.
Student Loans: I consider this a top offender because it’s such low hanging fruit. I have $7,124 in student loans remaining at an average of 3.9% interest. I kind of stopped worrying about these once I paid off the loans at 5-7% interest, but getting rid of that payment will provide a permanent boost to my cash flow.
Restaurants: I honestly expected my spending here to be a bit higher. I’m not too concerned here since we enjoy going out to eat roughly once per week. I will bump up the budget a bit to $150 per month and see how that goes.
Alcohol/Bars: I do quite like my craft beer, but I could probably stand to cut back a little here.
Coffee/Tea: Don’t worry, I’m not spending money at Starbucks every day. I enjoy making my own loose leaf tea or whole bean coffee every morning. I consider buying the high quality stuff to be money pretty well spent.
Update your budget to reflect your new goals
Once you’ve gone line by line and found where you can make cuts to reach your savings goals, update your budget. Feel free to round out some numbers to make it a bit prettier. Going forward into the remainder of the year, my main goals are:
- Reduce my spending in online shopping to $75/month by curbing impulse purchases of crap that I don’t need and only buying household goods and other necessities. Savings of $93/month.
- Reduce my spending on clothing to $50/month since my wardrobe is pretty established with high quality clothing at this point. Savings of $68/month.
- Pay off one of my two remaining student loans before the end of 2019. The loan has a current balance of $3,277. Savings of $51.53/month. Note that I left the student loan payment the same in my budget, since this reduction won’t take effect until I actually pay off the loan.
If I am successful in implementing these three goals my budget will be reduced by $212.53 per month, a respectable 7% decrease in spending. Here’s the final product of all my tinkering, and the budget that I intend to hold myself to:
Final thoughts and future commitments
The magic of decreasing your spending is that it has a two-pronged effect. It not only increases your savings rate to accelerate your path to financial independence, but also decreases the amount of passive income (and portfolio size) that you’d need to support yourself in early retirement.
Now you know why I believe that building your budget by starting from your actual spending habits is the most effective way to create a realistic budget. This is an absolutely essential exercise if you are new to learning about personal finance since it will help you get your spending under control and give you a good idea of how much money you can start socking away each month. And if you’ve been at it for a few years like me, there’s also immense value here in making sure that you don’t drift off course.
I really enjoyed this six month spending review and feel like I learned a lot. I think that I will continue doing twice-yearly reviews moving forward in order to ensure that I’m staying on track. I’d recommend adopting a similar interval to review your own budget — don’t go several years without really looking at it like I did!