Budgeting and living within your means

I just completed my annual review of our 2006 spending and setting up our budget for 2007. Starting back in 2000, after I graduated from college and got a “real job”, I set up a simple spreadsheet that let me keep track of how much money I was spending and on what. I knew that at some point I wanted to buy a house and I would have to know how much house I could afford.

The home purchase didn’t come around until the end of 2002, so I had close to three years worth of expense tracking at that point. It made a huge difference when Amanda and I were looking at houses, because even though we were pre-approved for a mortgage, comparing monthly payment for the maximum mortgage amount against our free cash flow instantly sent up red flags. We would never have been able to afford that much house.

I’m very conservative when it comes to managing my money, and my budgeting practices may seem over-the-top for many people. I keep track of every single purchase, to the penny. Every bill paid is entered. At the end of the year, I compare what I thought we would spend at the beginning of the year to what we actually spent, and then make adjustments for the next year. Sometimes the data surprises you. This year, we spent about $50/month more on groceries than I planned, but about $30/month less on the pets. Gasoline purchases were $20/month higher than I estimated. Since projects around the house are finally dwindling and I’ve purchased most of the tools I need over the past three years, I can cut my home improvement budget line significantly for next year. No more I-190 tolls means a big cut in that line item too.

My budget spreadsheet has grown to include 14 separate worksheets, which I use to keep track of not only our expenses and income, but each of our 401k plans, mileage driven for the CTRC (tax deductible!), and an overall view of all our assets and debt. I created a dashboard sheet that shows me my current monthly average spend and projects that over the course of the year. I look at and update it a couple of times a week. While it certainly takes a bit of effort to keep that close of an eye on things, it lets Amanda and I know without a doubt what our financial situation is at any given moment. It helps us plan for larger purchases and vacations. It lets us know if we’re getting carried away with unnecessary purchases that might cause problems down the line.

If you don’t have your own personal budget, I strongly recommend spending some time putting one together. What you find out from keeping track of your expenses might surprise you.