Learn to Budget (Part 2): Let’s start looking at the numbers

THE HARSH REALITY OF NUMBERS

Budgeting focuses on a single law, “track every penny”. The FI/RE movement tells us to spend less than what we make and take the left over money and invest it towards our future. I’ve also heard it called “paying yourself first”. They are two rather simple concepts, but they are surprisingly hard to achieve. This is because we’ve been conditioned to want “things” in life without thinking of the price. We’ve been trained to think that these “things” will bring us a form of happiness without criticizing ourselves of the harm it could bring. Let me ask you something, do you get the same value from watching YouTube from a $10,000 desktop set up versus a cheap $600 laptop? Are the experiences that you get from one versus the other THAT TREMENDOUS TO YOU? You can ask a ton of different people and you’ll eventually find the pattern that those that are focused on FI/RE will say “No”. Some might say “No, but I will want it in the future after I achieve FI/RE”. Others might say “No, I will never need it”, but the answer will always be some form of “No”. “No” is a hard word now-a-days to say, especially to yourself.

The temptation of spending anything extra is easy to give into. The crappy thing is saving is HARD! That’s why it takes discipline. If you have enough discipline to hold off your spending, then you’re well on your way to FI/RE. This is technically a part 2 of building your budget. If you haven’t figured out your goals, then you’ll definitely lack the motivation to achieve them. As a result, you’ll lack discipline. You need to figure this out first while being honest with yourself. Check out “Where do you start with a budget?”, for the steps before looking at your numbers.

Note: This kind of eases you into a budget, instead of trying to set the numbers for yourself at the beginning. JUST CUTTING EVERYTHING OUT AND JUST MOVING FORWARD, might be a bit extreme for some. If you’re like me though, power to you. Set those goals and stick to them and skip step one.

Step 1: Figure out what you spend on. TRACK YOUR EXPENSES NOW!!!!

Start tracking your expenses NOW!!! As in go back in your head today and try to remember what you bought. Now, WRITE EVERYTHING DOWN.

Even better if you can, look at your last bank account / credit card statements, and look over the last 30 days.

Easy, you’ve officially started the first steps towards dealing with the numbers of your budget. Tracking your expenses is a discipline that you need to do everyday for the rest of your life!!! MUAHAHAHAH!!!

There are apps out there that can help you with this by going directly into your accounts. I don’t use them because I don’t like companies using that data against me. However, I have heard some pretty good things about Mint and Every Dollar.

I just use a Numbers Sheet (Excel for Windows Users) and look into my credit card and bank accounts everyday and add rows into either the direct account chart (for my bank accounts) or the credit card chart when I use my only card to buy things.

People might be going THAT’S CRAZY YOU GOT THAT KIND OF TIME. To be honest, it only takes me about 10 - 15 minutes a day to get a whole picture of not only my day to day expenses, but my whole financial portfolio. This is because I have some serious Number / Excel skills and have everything connected to each other to update automatically LOL.

Remember, track your expenses from now on. This is because most things in your life will have monthly billing cycles. So it will be a good point to iterate on to see if you are doing well or not. Trying to micro-manage weekly or even daily budgets is insane and even I can’t keep up with that and I LOVE TO BUDGET!!!

Let me explain the charts and what I keep track of for each expense.

Categories

The “Direct Account Expense” column and the “Credit Card Expense” Column are the categories I divide my spending into.

In other words, since I shop at Costco for things that I can store or are cheaper in mass (diapers, various meats that I can freeze, rice, etc.) and shop at Ralphs for perishables (vegetables, fruits, and spices) they are their own expenses. However, they are both grocery shopping so they fall under the “Groceries” category.

IF YOU’RE WONDERING WHAT THE “CCCC” or the “MCDCC” categories are, those are me paying off our credit cards (my wife and I have one each.) I tend to pay them off VERY FREQUENTLY to avoid the insane interest, but like to collect a little bit of points.

Descriptions

The “Description” sections allow me to take notes of the expense. For example, I have a “Miscellaneous” category as a fall back to things that don’t need their own category like the fun account. However, we also use it as a place to track things like our yearly car registration. The Description allows us to know what we spent the money on with a little more detail. Think the “note” line on a check.

Date and Amount

I think these are kind of self explanatory, but just in case. It’s just tracking the day the expense happened, and how much I spent on that transaction.

“Account/Card” Charged

This is how I track which card we used for which expense for our credit cards in the credit card chart. In the direct expense chart, this is which bank account the money was taken out of when paying for things.

Step 2: Set a saving goals and make a “FI/RE” Category

Since your starting out, it might be best to make your own category for savings. I actually like this a bunch and think it’s the most practical thing to do when starting out. Later when you start to grow your financial muscle and savings discipline, you’ll be able to take your net gains from your monthly budget and invest that.

Start small, like saving 50 bucks next month. Increase the amount the second month to 100 bucks, and slowly grow till you can get to $250+ a month.

Put this away at the beginning of your month, so that you’re not tempted to touch it later. Once you flex that savings muscle for the first month, you’ll want to do it the second month because you hit your goal and start to get excited. Once you hit your second goal, you’ll want to go even further. See the pattern? For some reason, saving can be SUPER ADDICTING. It’s weird, but for some it’s because they finally start to feel like they have control over their money versus their money having control of them.

If you want to know what I do, I have a cell in my month sheet that tracks my monthly net gains and loss. I use that to send money into my investment accounts. If you don’t understand what I just said, don’t worry about it, you’ll understand it soon enough if you keep looking into expanding your finance knowledge.

Get excited for your savings

Investment Calculator <Click Here>

I found that calculator with a simple google search.

I did a simple simulation where you start with nothing in your investment accounts and only put in $50 every month. I put a pretty conservative interest rate of 5% that will help your money grow (If you look below you’ll find a google search of the average rate of the growth of the S&P 500 which clears 5% by nearly double). Finally, I asked it to simulate how much money you’ll have in 15 years.

Since this is the basics, don’t worry too much of the compound frequency. Just as general guidance, the more compounding intervals that better. This means that daily compounding is better than yearly compounding. You can see the difference yourself if you like yourself HAHA. (It’s somewhere around 500 bucks). Also, we won’t worry about things like inflation and other little percentages. THEY ARE IMPORTANT IN THE LONG RUN, but this is the budgeting section not the investment section HAHA.

Let’s see the difference just saving straight up and investing.

MATH:

Saving without investing: 15 Years x 12 months x $50 savings per month = $9,000

$13,364.45 (from calculator) - $9,000 (from above) = $4,364.45

As you can see, the difference between investing and saving is 4364.45. That’s almost a 50% gain for doing nothing but investing.

Use the calculator to dream big, see the difference between 50 a month to 100 a month. Try 250 a month. It’s CRAZY!!!

Step 3: Categorize and add up all the expenses in each category

Once you’ve got about a month worth of spending on written down, you should divide and group up (AKA categorize) the expenses. I divide my expenses into two types of expenses: Once a Month expenses (like rent / mortgages or subscriptions) and Running expenses (like groceries and eating out).

If you want to see how I break down my current expenses they are to the right. Let me explain them to you now.

Once a Month Expenses

Once a Month expenses are those that can be paid for as a lump sum and are regularly billed to you once a month, such as rent or subscriptions. All of my once a month expenses have their own category on my monthly budget. There are two reasons for this. First, is that I would like to make sure that I pay for the important things on time and don’t fall behind on them because I avoid late fees like the plague. So adding them as their own category versus just having one “Mortgage” category allows me to have a pseudo check list on whether or not I paid this month. Second, I really don’t like it when I get double charged in a single month because there was an accident or when the price of a subscription changes unexpectedly because you missed one of the spam emails. This helps me make sure that if the price changes I am aware of it. I can either think about whether I’m good with the price difference or if I want to investigate why the price changed so I’m aware of my status with these companies. (Sometimes being a loyal customer might pay off down the line, but now-a-days I kind of don’t think companies care as much as my parents think they do. It was a bigger deal to them.)

Running Expenses

Running expenses are those that have a bunch of smaller expenses that satisfy the category they are put into. At a quick glance, I only have four categories that fall under the “Running” expenses. Those are “Groceries”, “Eating Out”, “Miscellaneous”, and “Car Gas”. Because I make about two trips to Costco per month and as needed trips to Ralphs on the way home for vegetables, I just group and add all of these tracked expenses into the “Groceries” category and make sure I don’t go over. My wife and I don’t drive the car all that much unless we visit our parents, so we usually spend less than what we budget. However, there are months when we go out to see friends a little more often than usual or we go to Irvine to visit them, so we might take an extra trip or two to a gas station. I think you can get the picture here, so let’s move on.

Step 4: Track your Income

This is a little more simple, since I’m just going to assume you love it when you make money and know where all of your money if coming from when it enters your pocket.

Just in case so that I’m very clear, you MAKE SURE TO TRACK YOUR INCOME TOO. You might have a month where you get a bonus from work. You might get a really nice Christmas gift from your family one day as cash. Track all of that here. (Don’t worry about gift cards, at least I don’t lol) The reason is because, once you get something like that it’s easier to just say… “Well it’s extra and not in the budget, so I'll just buy something nice.” STOP!!!!! You should pay a little extra to your self / debt, before you spend anything extra on stupid crap that you don’t need and this will help you do that.

That’s it. The overall monthly numbers are now in your face. This is what your month looks like and you’ve done a great job if you completed it. Now, this was the easy part. Just the basics. Now the next part is where you take the math and goals into consideration, but that probably deserves it’s own article lol.