A large amount of my finances are based on yearly living expenses. Each year I increase my yearly expenses by about 2% and I review again at the six-month mark. Here’s my new Budget 18.0 total and initial allocation for 2018.
Last year’s budget 17.5 was $3,970 a month which includes both wants and needs. This year I’m increasing the amount to $4,040 or about 1.8%. I consider personal inflation more important than “official” inflation so 1.8% is simply a number near to 2% that gave a nice rounded result.
I’ll review the budget again in the middle of year, although I’m not allowed to increase the total. In Intel’s tick-tock terminology, the first half of the year is a tick.
$4,040 a month is $48,480 a year which covers most expenses (needs + wants) for Ms. DL and I. The only major expense not covered here is my monthly car lease payment which is paid out of Savings. I consider the car lease a debt rather than an ongoing expense and I like to have the money in my Savings to back up the debt. So instead of paying the lease upfront at once, I’m stretching it out with a monthly transfer from my Savings account.
Not your standard budget
I call it a budget, but it’s not a strict implementation and it’s no big deal if I over-spend in a month. That’s because the monthly amount is designed with the expected yearly amount in mind.
Lower payments for some of the year build up a credit which is offset by higher payments in the rest of the year. Since I keep several months of living expenses in my bank account, it’s okay for the category to go negative for a while, as it’ll eventually build back up, and vice-versa.
Let’s take the electricity bill as an example.
I estimate that I’ll pay a total of $1,466 in Electricity bills in 2018, which is $124 a month. Therefore $124 is added to the Electricity category each month. That’s the same monthly amount as in 2017 as it happens since my actual yearly 2017 electricity costs came out to be $1,228. So I didn’t need to increase the amount this year.
Now our electricity bill tends to be lower in the summer, than in the winter. For January 2018 the bill was $83.02, February was $108.85 and March $139.66. So 3 x $124 – 83.02 – 108.85 – 139.66 means that at the end of March, the category is +$40.47 from the start of the year.
I can also shuffle money between categories if I choose to although I prefer to revise the figures in a mid-year Budget revision (due to new property taxes, new insurance premiums etc.).
The amounts in each category are tracked in that great Personal Finance software called Microsoft Excel. I don’t use Quicken for this as I prefer the flexibility Excel provides. Quicken helps me reconcile the numbers in my Excel sheet however
Now come closer and I’ll let you in on a secret…
In any given year, I’ll almost always exceed my budget.
Oh, the Horror! But it happens. For example in 2017 I had a lot of medical expenses and had a new roof installed.
Any additional expenses come out of my Savings. Each month I save a total of ~$1,200 from my pay check. My Savings are likewise categorized for different purposes and I tend to view it as a longer term expense account.
Because the thing about Savings is that the money is intended to be spent eventually. Once you’ve saved enough for the house / wedding / holiday then you spend the money. Unless you change your mind of course. The point is that there’s usually a purpose for Saving, and it’s usually to eventually spend the money.
My Savings acts as a kind of Rainy Day Fund in some respects since I have categories for home repairs, car repairs, unexpected travel plans etc. It’s one of the reasons that I repurposed my designated Emergency Fund and put it to work in my Income Fund.
But … aren’t your real living expenses equal to your monthly budget plus savings?
I get this question all the time! Just kidding, it’s never come up before.
The answer’s “yes”, of course. However I rationalize it the following way.
We currently have a mortgage payment but in the future we won’t have one. When it’s paid off I’ll keep my Living Expenses the same as before. The $1,200 principal payment then becomes the spare money for Savings / rainy-day expenses. Likewise, we won’t always need two cars, so there will be extra savings there. I think that eventually, lower expenses from retirement plus yearly increases in my budget will reduce, if not eliminate, the need for Savings.
So, I figure that it’s best to keep track of expenses / spending and allow small cost of living increases based on my personal rate of inflation. It allows me to do all future planning based on a known amount, knowing that some additional money will be freed up in the future.
Time for some numbers! And tables!
Here’s the change in the categories that I’m applying from January 2018 through to the end of June.
|House: Property Tax||460 (+2)||458|
|House: Improvements||47 (+12)||35|
|Auto: License||20 (+1)||19|
|Tax Withholding||56 (-2)||58|
|Subscription: Credit Cards||48||48|
Hopefully the categories are all self-explanatory. They’ve not changed from Budget 4.5 where I described them in more detail.
I broadly categorize everything in one of two groups – Mandatory (aka Needs) and Discretionary (Wants). The $70 increase from $3,970 to $4,040 is applied as $35 to both Mandatory and Discretionary categories.
No major savings, some increases.
I’ve not made any significant cost savings to monthly expenses so far.
I’m putting a more aside this year for Home Improvements and Groceries (which includes non-food items such as cleaning products and other household items).
I no longer have to worry about visa / citizenship application fees so that category is gone. Passport and other fees are grouped into Travel.
Travel, Gifts and Dining are the three areas where I spent most last year, so I’ve increased those categories again this year.
2017 Year-End Results
Here’s a look at the changes in my overall Cash and Savings balances during 2017.
|Account||Dec 2016||Dec 2017||% Change|
Although Cash increased during 2017, I’m still below my target of 5 months of expenses in cash. I had 3.47 months at the end of the year, up from 3.3 months at the start of the year.
The budget reviews force me to look at my actual / projected spending and take action. I’m expecting some additional expenses later this year which will likely need to be paid out of Savings, plus I’ll have an update on the mortgage as I’m making some changes there.
Quote of the day
A budget tells us what we can’t afford, but it doesn’t keep us from buying it.