Where Are the Leaks in Your Budget? | Moneta

Blog

Have you ever felt out of control with your monthly spending?  Have you come to the end of the month and wondered where all the dollars went?  If you have, you are not alone.

Whether your net worth is great or small, most financial professionals and experts would say it is important to have a budget or family spending plan.  Tracking spending is the only way to be accountable to oneself and one’s family to ensure that you are deploying your family assets in a manner consistent with your goals.  In a nutshell, tracking your spending allows you to see where dollars are going, identify leaks and plug them before you sink.

Getting started is as simple as grabbing a notepad and pencil and writing down your sources of monthly income.  These might include a paycheck, alimony payments, IRA distributions, Trust withdrawals, etc.  Total all of these sources of funds to see you total household monthly income.

Next, write down all your monthly expenses.  Most people can easily identify fixed expenses (mortgage payment, gas bill, etc.) but may run into trouble in identifying variable expenses (gas for the car, eating out, etc).  Additionally, for most people, cash is the hardest thing to quantify, but it should be quantified—at least as accurately as possible.  Total all these expenses to see your total household expenses.

Hopefully at this point, your total household expenses are less than your monthly income.  If that is the case, your budget is running on a surplus, which is good.  If your expenses are higher than your monthly income, you are running a deficit, which is not good.

Whether you are above or below water, this is the time to allocate specific amounts toward each expense on a monthly basis.

It is at this point in the process that most people “take off the life vest” and fail to follow through.  They assume they have allocated the ‘right’ dollars to each expense and simply end the process.  However, the most important step in the budget process is to actually track monthly income and expenses going forward.  By doing this, you are able to see if you are actually spending what has been budgeted for your monthly expenses, and also make sure that your income is consistent with your assumptions. Now you will be able to identify the ‘leaks’ in your budget and see where your assumptions might have been wrong.  Track your income and spending for at least six months to develop a good idea of where your funds are going.

Once the leaks are identified, it is up to you to ‘plug’ them by curbing your spending or allocating your monthly income more appropriately to each expense category.  Admittedly, this is a hard thing to do.  However, you will feel more in control of your financial situation when you actually know where your funds are going on a monthly basis.  It might be that the money you are spending is right in line with your goals and thinking.  Or it might be that you need to make changes.  The only way to find out is to be disciplined enough to go through the process.

Here is a good example of how you can easily lose track of dollars if you don’t track them.  Have you ever heard of the ‘latte factor’?  Having a cup of coffee at Starbucks every morning has become the norm for many people over the last decade.  Most people think a few bucks here and there won’t add up to much.  But consider the following numbers if you only go to Starbucks three times a week.

Estimate of Grande Latte Cost                   $4.00

Multiplied by three times a week             x     3

Weekly Cost of Starbucks                             $12.00

Multiplied by 52 weeks                                 x   52

Yearly Cost                                                         $652.00

I actually think my numbers are conservative when you consider the add-ons you might include when you get your coffee—a scone, bagel, bottle of water for the car. Did you think you were spending more than $600 for coffee?

Dorn, Tony square

Tony Dorn, CFP®, MBA

Tony is the professional consultant for Katie Kearins.