I've tracked my spending and have created a budget, now what do I do with it?

Question

I have spent considerable time this year tracking my expenses and income so that I can have confidence in my household budget. I've been using an Excel spreadsheet that I found to track everything into various categories. In many cases I've used 6 months of spending averages to come up with my various monthly amounts.

My question is, what should I now do with all of this budget information I've gathered? I'm not in any kind of serious debt (car+mortgage), I have an emergency fund, I am already saving amounts I am comfortable with for retirement, etc. A great deal of the advice about budgets is geared towards those in a crisis or to simply go out and create one. Now that I've created one, I'm not quite sure where to go next.

So far with my budget I have:

• Compared the totals for obvious questionable spending
• Reviewed my mortgage percent of budget (What percentage of my budget should the mortgage be?)
• Reviewed my food spending percent of budget (How much is a typical food budget per person?)

Answer 1

Decision making

Having been in exactly this position (not in a debt hole, built a budget to get a better view of what spending is), I can say what the greatest gift it brings is: it's a decision tool.

When you are spending out of only one account, you often make decisions based on the total money in the account. “Should we go out for dinner? Can I make this impulse purchase?” This is terrible, because many, if not all, of those dollars are already intended for certain future expenses like groceries, bills, etc. You can't see how many of those dollars are discretionary.

A budget is like having many accounts. Instead of looking at your real account(s) to make spending decisions, you look at your budget lines. You to want impulse buy a gadget — do you have money remaining in a relevant budget line? If yes, the decision is yours, if no, the budget is telling you that you don't have dollars for that.* Similarly for more prosaic purchases — you want to splurge on some non-staple groceries to make a fancy dinner or try out a new recipe, and the budget line for Groceries will tell you if you can do that. Instead of looking at (e.g.) $6000 in a chequing account, you're looking at $600 (assigned) − $146.86 (spend) = $453.14 (available) in a monthly groceries budget line.

Just like you can now see where your money has been going, by maintaining and using your budget lines, and having every single dollar you spend go through the budget (to show your totally assigned, total spent, and total remaining), you can continue to see where your money is going in near real-time. You're no longer looking at bills and statements to figure out what's going on and plan, you're looking at money flows and future intentions, as you should be.

This approach to budgeting has completely changed our finances.

• Instead of feeling like a weight, we actually enjoy paying off our bills — it makes the budget tidy.
• We feel free and guiltless to spend money that has been earmarked to spend freely. (Having a personal “fun money” line is how we do it. I've heard of others with multiple budget lines devoted to the same overall personal spending amount, in order to sub-budget that money. Whatever works for you.)
• We are appropriately miserly when considering other budget lines. Do we want to change our (e.g.) cable package? This new feature is only an extra $4.99 a month (“that's nothing!” we would have thought before)… but is it really worth it to increase that bill's budget line by $4.99 a month, because we have to ask ourselves from which other line do we subtract it?
• Borrowing money in a smart way is easier, since we can see exactly how it affects current available funds and compare that with projections of how it affects future available funds. We can plan precisely for how to pay it off, and see how it affects the budget of future months. No longer do we have “borrower's regret”, where the reality of future payments is more painful than anticipated.

So that's what a budget is for: real-time spending decision-making control over your money, which for us has translated into a lovely mix of painless austerity in spending categories where austerity is smart, and guilt-free spending in more indulgent categories because we have already determined exactly how much we can afford and wish to spend.

^{* A budget line with insufficient funds doesn't actually take the decision entirely away from you though. If a budget line doesn't have funds to spare for a given purchase, you can still make the purchase — but now you're also making the decision to go and revise your budget, taking dollars away from other budget lines to adjust the line you've overspent, to keep the budget accurate.}

Answer 2

I'm reminded of a conversation I had regarding food. I used the word 'diet' and got pushback, as I meant it in sense of 'what one eats'. That's what a diet is, what you eat in an average week, month, year. That list has no hidden agenda unless you want it to.

If your finances are in good shape, debt under control, savings growing, etc, a budget is more of an observation than a constraint. In the same way that my bookshelf tells you a lot about who I am, books on finance, math, my religion, along with some on English and humor, my budget will also tell you what my values are.

Edit - In a recent speech, regarding Joe Biden, Hillary Clinton said "He has a saying: ‘Don’t tell me what you value. Show me your budget and I will tell you what you value.’ " - nearly exactly my thoughts on this.

For the average person, a budget helps to reign in the areas where spending is too high. $500/mo eating out? For the couple hacking away at $30k in credit card debt, that would be an obvious place to cut back. If this brings you happiness, there's little reason to cut back. The budget becomes a reflection of your priorities, and if, at some point in the future, you need to cut back, you'll have a good understanding of where the money is going.

Answer 3

I think the answers you're going to receive are all going to be a bit subjective. Looking at it from a high-level point of view, having this budget nailed down lets you analyze:

1. Where you currently stand - Are you spending more than you should be/thought you were on certain areas, such as eating out? Do you see room for improvement in better managing those areas? Are you putting as much into savings/retirement as you would like and would need to live and retire comfortably? What about college funds for kiddos/future kiddos? (College is damn expensive when they want to go half-way across the world to study pottery making.)
2. What you're able to do - Is there a large purchase you've been holding off making or perhaps a dream vacation to Wilmington, DE that you could now afford?

Now you've got your budget, stick to it! This is really the most important part. You've done your homework, now make sure you don't exceed it without a good reason. If you're under budget in any given month, have a plan on what to do with the excess funds. If you go over budget on a certain area, you can react accordingly.

I, personally, recommend hiring a financial planner. Ours has been a huge help with looking further down the line than we had been originally. If you show up to your first meeting with an FP and have this budgetary breakdown ready to go, you'll probably get a high-five. Well done, you!

Answer 4

Whether you use a professional financial planner or not, the basic steps are the same.

1. Find out what your past expenditure actually was. This activity on its own achieves nothing, of course.
2. Make a plan of what you would like your future expenditure to be. This also achieves nothing, on its own.
3. Compare (1) with (2), make some decisions about what you need to change, and then make those changes to your lifestyle.

It seems like you have done some detailed work on step 1, perhaps less detail (but not necessarily insufficient detail) on step 2, and concluded that you don't need to change anything in step 3.

That's fine - if you concluded that you don't need to change anything, then you don't need to change anything! What you need to do from now on is

4. Monitor the situation, and if circumstances change, review the decisions you made previously.

There is nothing complicated or difficult about any of this. To paraphrase Charles Dickens, "Income greater than expenditure - result, happiness. Income less than expenditure - result misery."

Talking to a financial planner might encourage you to spend less (though of course you just acquired a new expense, "buying financial planning advice"), just like joining to Weight Watchers might encourage you to eat less or exercise more. But in the end, it's you who have to take the action - other people can't do it for you.

Answer 5

Use the budget to drive down spending so you can save (for retirement, for college, for expenses) and so you can pay off your mortgage early. Some, (Dave Ramsey, for example) advocate for an "Envelope system"... If your budget says 100 a month for restaurants, then at the beginning of the month, you put 100 into that envelope. Once you've spent that much on restaurants that month, you're done for the month. On the other hand, if you don't spend the 100, then you have two choices: either you can adjust the budget downward and put the money somewhere else (like your Mortgage) or you can build up cash in that account so you can afford a really expensive restaurant in a few months.