Budget by indicators

It is difficult to track every penny in or out of our hands.  From 2009 to 2011, I actually tried to track every transaction including cash, credit, debit, etc…  I recorded over 1,000 transactions, which was very time consuming.  There was some merit to this exercise, but I would not recommend for anyone to try this exercise unless you have a lot of time on your hands.  The granular details do not always give you as much useful detail as the month to month data.  How can this be and what do I mean by this?

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In 2012, I started to sit down on the first of each month and would review all my bank accounts, investments, and expenses.  I used a spreadsheet to record each of these items each month, which allowed me to start building a useful database to track the flow of my money.  Where am I spending my money and is there potential to save?  I split everything into two major categories- 1) Income, 2) Expense.

Income is any money earned and incoming.  Expense is any money going out.  These are two simple concepts, but very important.  Most people only have one source of income, but many sources of expense.  If you lose your job, you will not have any money coming in.  If you get rid of an expense, you still have many more to pay out.  The wealthy typically have many sources of income, which is very smart.  They are providing themselves with multiple sources of income, which means if one source of income fails, they still have a few other income sources generating cash.  You will want to have your main source of income (i.e., your job) and start investing your money when you can to build secondary incomes (i.e., side business, stock market, mutual funds).

Note: do not invest your money without thoroughly investigating the investment opportunity.

Each month sit down and review your income and expenses.  Record each balance for your bank accounts, 401k, stocks, gas bill, credit card bills, electric bills, mortgage, and so on.  While doing this, you will pay each of your bills and track that you paid it, so you do not accidentally miss a payment.  We must avoid any unnecessary fees wherever possible.  You will also want to create totals for income and expenses each month.  You will want to have a separate spreadsheet tab where you can track at a high level your progress in terms of total saved.  So, why do we want to do this?  How will we benefit from doing this?  Especially when there are APPs out there that automatically provide you updates on all of this information?

It is important to manually go through your finances to become aware of  your financial trends.  By looking at an APP and not doing the manual work, you are not likely to draw conclusions and make smart choices.  For example, when someone uses a credit card they are likely to spend more money than if they were using cash.  The reason cash users spend less money is because they are physically handling the money and visually observing money changing hands.  The same concept applies for those who do not put much effort into tracking their expenses each month.

To properly formulate a budget, you will need to first understand your current situation and ask yourself where you want to be in the future.  As I mentioned, it is very difficult to track each transaction, so you should use categorical indicators.  There will be indicators in both your savings and debt categories that should be used to observe financial trends.  For example, you can focus on your savings and 401k for savings- the good.  You can focus on your mortgage and car payment or student loans for debt- the bad.  Each month, you will focus on these indicators to understand if you are on track to your goals.  This is the way I have been doing it for a while and it has been working nicely.  I do not need to track 1,000s of transactions to be effective in managing my money.  If I feel the trend of these indicators falling behind where I set myself to be, I can set restrictions on my spending to get myself back on track.

This is not the only way to track your money and achieve your financial goals, but in my opinion, budget by indicators does work.  You are tracking your money by tracking select budgets (i.e., bank account, 401k, gas bill, mortgage).  This method is purely used for tracking and giving you information to estimate your progress towards your financial goal.  In other words, budget by indicators is a tool to help you realize if you are on track financially.

 

2 Comments on “Budget by indicators

  1. Pingback: Battle of bill increases – Civil Accomplishment

  2. Pingback: The importance of managing your career – Civil Accomplishment

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