Written in collaboration with Jeff Milkie.
The Preliminary Budget
I conquered the art of expense tracking and we were able to construct our budget based on my findings and annihilate irresponsible spending. This takes some sacrifice. But the discomfort is temporary. Expense tracking taught us how we were spending so we could manage our money to work for us and our needs. Once we got the finances pinned down—how much we were spending where—we came up with a budget that allowed us to spend and save in the categories we created for each month, and pay down the student loan.
The most challenging part of budget creation, although seemingly obvious, is prioritizing where and how to spend money. To do this, we had to decide what was important to us. We wanted to accelerate my loan payments. We wanted to go on vacations. We wanted to eat out every once in a while. These items became categories we built into the budget. We did not want to completely give up all fun, we just had to be smarter about how we spent our money.
There were categories I wasn’t willing to cut spending too drastically, like food for instance. Health and nutrition are important to me and I do my best to buy and prepare whole, unprocessed real food. Because we live in a country obsessed with fast and easy, it isn’t as affordable as it should be to buy whole and healthy foods. But there are some guilty pleasures I indulge in from time to time. To reduce our spending here, and satisfy our health priorities, we cut the amount we spent on snacks, ice cream, and alcohol. We did not cut those things out completely (you gotta live right?), but decided to purchase them more moderately, on the weekends or special occasions.
Items that we decided were not as important to us allowed us to make spending cuts. These included things like cell phone plans (we found ways to reduce ours), new clothes, new household items (unless absolutely needed), beauty products, cable, etc. Adopting a minimalist mindset really helped us cut our spending, and save our money for the things that mattered.
Balancing the Budget
Using the reprioritized spending categories from our expense tracking, we setup a spreadsheet to balance our budget—the Master Budget sheet (as mentioned previously).
Again, the categories are what works well for us and we have included several others that may be relevant. There are six main groups.
- Income: Here we put the net money coming in—our paychecks. We don’t track taxes (they just make Jeff angry) or benefits deductions, but we could.
- Transfers: Here we include all the money we transfer out of our paychecks to another account including retirement, savings, or for medical expenses in the health spending account (HSA). Because we pay for all our medical expenses from the HSA, we include medical expenses in this section. We also include any transfers out of savings as well.
- Expenses: Our expenses are divided into four categories. The groups are color coded in the spreadsheet by group…
- Expenses - Reoccurring Necessary
- Expenses - Reoccurring Discretionary
- Expenses - Necessary
- Expenses - Discretionary
Reoccurring expenses are separate because we don’t make a decision to spend this each month. We include insurance payments and other expenses that are made irregularly by separating them into monthly amounts. For example, if we pay $600 for 6 months of car insurance we put $100 in the budget each month. Necessary expenses are areas we know we will have to allocate some of our budget to live. Discretionary spending are for things we decided we would like to allocate money towards based on our priorities. These are the hardest to finalize so the budget is balanced.
If you look back at your expense tracking sheet, I mentioned before the Target column. Here, I input the amounts we set for the Budgeted column in the master spreadsheet so I can see where we stand throughout the month.
The other additional item previously mentioned was Magic Money. This includes unexpected income like gift cards, cash gifts, store returns, cash back rewards from our credit card. This is added both into the expense sheet and the Master budget sheet and subtracts from the amount spent—giving a net positive for items purchased using a gift card, cash back, etc.
At mid month and at the end of the month, we do a budget review. I keep track of the expense sheet and Jeff inputs our current totals into the Master budget spreadsheet. This keeps us both involved but can easily be combined. Then we evaluate to see how well we are doing.
Spending time to determine our priorities (both financial and for life in general) made all the difference. For us, all additional found money from saving elsewhere went towards the loan until it was paid off. I don't believe in “good debt”. Debt is debt, but some is certainly worse than others. I still have a car payment, but it has a 0.9% interest rate, unlike the 6.55% interest my loan was accumulating. But while we were throwing any and all extra cash we found at the loan, we were also saving for vacation and allocating money towards things we liked to do! Again, you don’t have to live like a monk (unless you want to).
The key principle that I learned through this process: it’s not about cutting out the things you enjoy to save a buck, it’s about reallocating your money so you can afford the things you enjoy and still pay the bills.