Monday, March 12, 2012

A Close Look At Expenses

A budget deals with two items: income and for expenses. We have previously covered what you might expect on the income side as a new intern/resident. Now let's talk about expenses.

Most people live on a fixed income. They may make more or less than average but their income still stays about the same every single month. Would you be surprised to know that people who make several hundred-thousand dollars a year run into the same kind of money problems as people who bring in much less? The issue is not how much money you make, it's the way you spend your money that makes the difference.

Do you know what your expenses (obligatory and non-obligatory) are and the frequency in which the occur?
Do you know what expenses you might incur in the future?

When I started budgeting I learned something very quickly. I couldn't use a budget created by someone else. The ones that say you should spend x% on rent, x% on food, x% on movies, etc. I am not generic, I am unique and so are my expenses. No two people are going to spend their money in exactly the same way, that's why only you can make your budget. I could do it for you, but guess what... you wouldn't like it and it would not respect your priorities for your money - it would reflect mine!

You have to do it yourself (or with your spouse/significant other). The good news is it is not difficult.

If you don't already know what your expenses are it might be tempting to guess. That would be a fun exercise! You see expenses are a lot like calories. I always think I eat less than I actually do. Same goes for spending. If I didn't already know what I spend on certain categories I would be very surprised by some of the results. So if you are interested in seeing how close or far from reality you are, try making an estimate.

I believe that our past performance is the most accurate indicator of our future performance. You need to know what your baseline is for spending. Without trying too hard to change your behavior, spend your money as you normally do and record your expenses as you go.

This is going to require some work on your part. I do all of my financial transactions through my debit card and they are recorded online. I then transfer them to a spreadsheet. If you use cash you will need to write down your purchases or keep receipts. You can use cash, debit cards, a combination of both. You can keep track in a notebook, the back of an envelope, a spreadsheet, fancy software, or an app on your phone - you decide! The bottom line is that whatever method you use to track your spending habits that YOU TRACK THEM!

Once you have a months worth of expenses you need to start categorizing them into groups as large or small as you feel appropriate for your situation. Here are some suggestions to get you started:

Auto loan(s)
Child Care
Home maintenance
Credit Card Payments
Student Loan Payments

Now that you know what your expenses are you can compare that number to the income you received for that month. My hope is that your expenses were less than your income, but I am also a realist and know that they seldom do if you haven't been keeping track before.

That's okay, don't get discouraged. Now we can start creating a budget for this month based on what we already know we have spent in the past. Warning: do not get stuck in the tracking phase... you eventually will need to move on to the budgeting part. Tell your money where to go, don't let it tell you where it wants to go. Take charge!

Remember: each of these budget line items are trying to get as much of your money as possible for themselves. My clothing budget wants much more than it gets. My food budget would have me eating yummy expensive foods every day. My entertainment budget is screaming for me to do something, anything just to make an entry! You get the idea. If it helps you can imagine your budget items as small children who are trying to grab as much candy as they can when the pinata breaks, also know as payday. They don't care how much anyone else gets, they just want to make sure they get as much as they can.

As you start to categorize your spending habits, you may immediately begin to see some patterns. I had no idea I ate as much ice cream as I did! Seriously. I also didn't guess that I ate out as often as I did. I spent money on things I didn't even need, but used shopping as entertainment... I spent money because I was bored! Note, this is all past tense. Not anymore, except the ice cream part - that still gets me, but now I budget for it:-)

The idea is to look at the patterns you have noticed and decide whether the spending was necessary or unnecessary. Sometimes just being aware is enough to change our behavior. Other times it requires some determined action on our part.

As you review your expenses items will begin to come to mind that you could have done without. You will start to see places you should avoid because you seem to always spend money there. For me it is Target, I always find something there I don't need - so I stay away! You will look at the frequency with which you do things and begin to make notes in your head to not do that so often. It will happen.

After doing my budget for a few months I started to break these down into even smaller categories. I wanted to know how much I was spending on eating in vs. eating out, how much of that clothing allowance was for me or the kids, how much was for gifts we were giving to each other and how much was for gifts for others. Knowing specifics made it easier for me to identify my unique problems.

That's what is great about making your own budget, you can decide what to do with it... you make the rules!

Even though you might make the rules, the equation doesn't change. If you always spend more than you make, you are in serious trouble. If you spend exactly what you make, you are in trouble and trouble is coming. If you spend a little less than what you make, you are probably worried and you should be. That worry is a warning that you need to do something.

I don't know what the magic number between income and expenses is, because it will be different for everyone. But I do know that spending everything you make is a recipe for disaster. Even the most carefully crafted budget is unable to predict every possible scenario. But your budget can provide a way for you to save and prepare for what you can't see today.

Next: My Budget Exposed!

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