1% Better: Budgeting

I don’t think about how I’m spending money very often. Every January I set up a spreadsheet with my projected income, expenses, and investments for the year. Each month I check my credit card balance. If it’s under $700 I know I was frugal. If it’s over $1,000 or, gasp, $2,000, I know to rein in my spending next month. Most of my major purchases are simply made based on if I have enough cash in my checking account and if it feels right in my gut. The following January, I compare my actual savings and investment balances with my projected values. Not surprisingly, I always come up short.

In this regard I’m probably an average member of the American middle class. But this year I was frustrated that, yet again, I came up short on my savings so I decided to do something about it. I pay for almost everything with a credit card and I have a neglected Mint account, so I started digging through my spending history and built a spreadsheet of every penny I spent last year. What I found is that my budgeted categories were actually very accurate, however my “one time” expenses went out of control. The spur of the moment vacation trips, the nice new bed, an elective surgery, and others ate up a good chunk of my expected savings.

I made a new budget spreadsheet with realistic breakdowns by category. I also built in a “one time” expense budget that I’ll (try to) stick to. This will force me to weigh my big purchases and prevent impulse spending. It also encourages me to shop around for better deals.

One category I overspend on is food. Last year I spent about $300 per month on food. The USDA published a monthly food cost report. According to that report, my food budget puts my squarely in the “moderate cost” plan.

Thrifty plan $183.70
Low-cost plan $237.20
Moderate-cost plan $297.30
Liberal plan $365.30

Over the past two months, I’ve been planning menus and monitoring what I have on hand so I don’t end up in a situation where I feel like it’s easier to get fast food than go to the grocery store before preparing dinner. It’s working. My January and February food expenses were $251 and $193 dollars. It’s one week into March and so far I’ve only spent $41. I have enough food on hand to prepare at least 5 or 6 days worth of meals. I can’t really tell that my eating habits have changed. I might even be eating healthier now that I’m paying attention to it.

Another step I’ve taken to control spending is paying myself first. I adjusted my 401k withholding so I’m investing as much pre-tax income as possible. This not only takes the money out of my paycheck before I ever see it, but it is also going to provide me with significant tax savings this year. I have a minimum monthly investment target I want to hit so I set up automated stock and bond purchases with my broker. Now if I want to go over my spending allowance, I’ll have to convince myself to sell assets and transfer funds around. Basically I’m increasing the friction necessary to spend money.