When you start to feel your pants get a little tighter you may realize that it’s time to go on a diet. The same can be said about your financial situation; when times get tough you might start using a “money diet” (more commonly known as a budget).
But what is a budget? A magic money saving technique that will provide you with the extra cash you were unable to hold onto in previous months? No! Budgets, like diets, are fixes for temporary issues, but they don’t get to the root of the problem. Reduce caloric intake, lose unwanted fat. Limit the coffee shop trips, have more in the bank.
A standard budget spreadsheet will show all of the income received in a given month. Then bills are subtracted out, leaving you with your disposable income. That’s it.
More advanced budgets will break down disposable income into categories (ie. Groceries, Restaurants, Gas, Clothes). Let’s say you gave yourself $300 for the month to eat at restaurants. More than likely you will think to yourself “this money has already been allotted toward dining out so I might as well spend it all”.
The Moneyseeds were notorious with this, even until recently. We were just putting $600 into an account labeled “Want”, allowing us to spend that money freely throughout the month. It was great! We went to coffee shops, restaurants, department stores and bought whatever we wanted. As great as it was, we found ourselves spending just to spend. Were we failing our budget? Or was our budget failing us?
You’ve already been tracking all of your expenses to the penny. After about a month of doing this, you’ll have a decent idea of where you normally spend money. But, why do you purchase the things you do? Tracking your expenses doesn’t really answer that question.
Next to every transaction you should begin to write down the category that it would represent. An example would be:
Chipotle, $10.50, “Fast-food”
Notice that this is more specific that labeling it as “food”, because “food” could mean groceries, restaurants, or non-food grocery items like beer. The same idea would hold true with clothing:
Kohl’s, $20.43, “Clothes for work”
A separation may be necessary in heavy spending categories. Now you can see what part of your budget goes towards clothes for work, specialized apparel (golf shoes, dress for an event), or clothes to make you feel like the hotness in public.
Personally, I accomplish all of this by using Mint.com. I don’t write out a budget of what I can and can’t spend money on, but I do closely follow our transaction history. Since Mint is able to logically display all of your credit and bank accounts in one place, you can easily see what your big spending categories are, or in other words, where your problem areas are. Obviously Mint can’t help you log any physical cash transactions, but if you are one of those people that never carry cash, like me, then it shouldn’t be an issue.
The final step is to divide the total spent in each category by the value of one hour of life energy.
To pay my mortgage alone I have to spend 251 hours of life energy. Child care runs me about 126 hours of life energy. These are two inflexible categories, because their rates don’t change from month-to-month. But you can see how much life I have to give up to be able to pay for my house and our daughters’ day care.The mortgage for our home is about $2200 a month. We had calculated that my life energy is worth $8.75 (by subtracting the cost of working from take home pay). Just for this post we won’t take into account our other streams of income (Mrs. Moneyseed’s income, blog income, etc).
It’s eye-opening to see how hard you might work and how little it actually gets you. Next time you’re about to buy something, do the math out. How many hours of life energy are you willing to spend?