Our 3 Best Money Choices—#3

Jun 18, 2013 by

Benjamin FranklinLet me violate a cardinal writing rule and first bombard you with a few clichés:

“YOU CAN’T MANAGE WHAT YOU DON’T MEASURE.” – old management adage, attributed to an anonymous old manager.

Our 3 Best Money Choices: #3—Plan, Measure, and Follow-up

I left this Best Money Choice for last because I know many are resistant to the ideas I’ll outline here, mainly I think because they find them extremely tedious and un-fun, and some people are ‘big picture’ oriented vs. detail oriented. I get that. Each of us needs to find our own path to the end goal: financial success. But planning, measuring, and following up has been very effective for us. You may be the sort whose solution is simply to earn a ton of money and more or less overwhelm any benefit of spending carefully, budgeting, and planning. If you can do that, more power to you.

I would ask just one question though: how many successful businesses can you name that rely solely on revenue for their success and ignore budgeting, planning, and controlling expenses?

With that preface, our #3 Best Money Choice has been:

  1. Having a short and long-term plan;
  2. tracking our income and spending against our plan; and
  3. understanding the reasons reality differs from our plan (it always does!).

Here’s a bit of detail on each element.

We Have a Short and Long-Term Plan

We began in 1998 using Quicken to create a monthly budget. Our budget comprises maybe fifty spending categories and a handful of categories to capture the income we receive from different sources (e.g. employment, gifts, gambling [ha!], interest, dividends, rent).

Part of our planning includes an annual Summit Meeting, to which I bring a report on the prior year’s spending vs. our budget, a draft budget for the year just begun, and a six-pack of chilled adult beverage. At the Summit Meeting we review how we did last year—saving, spending, earning, investing—and fine-tune the budget for the upcoming year, incorporating specific (and vigorously negotiated—hence the six-pack) plans for travel, house projects, etc.

At the conclusion of the Summit Meeting (though I think the one from 2003 is still going on), we’ve got a monthly budget for the upcoming year and at least tentative ideas for significant spending items like trips, renovations, major appliances, and so on. We also talk about longer-term aims and investing strategies, like will this be the year the stock market crashes 50% again?

We Track Income and Spending Against Our Budget

Yep, each of us inputs to Quicken (actually we switched to iBank last year, since Intuit hates Mac users) our spending and income as the year progresses. When Ms. Money Counselor spends money, she records the number on a slip of paper always in her purse. Then she sits down periodically and does data entry. When I spend money, I stuff the receipt in my pocket and throw these on my desk until I feel like entering them into iBank.

We Review Monthly Budget vs. Reality Reports

One of a long list of things over which Ms. Money Counselor is frustrated with me right now is my refusal to print budget reports. I create PDFs and send Ms. MC a copy, but she likes it on paper. Then she can get out her big calculator and “work her money,” as I call it, which includes making handwritten notes on paper budget reports to be organized in her piles files. But after spending most of a day shredding paper before our Big Move, I resolved to eliminate paper from my life to the extent possible. Plus that printer ink is really expensive, what a racket!

The point is, we look at monthly budget reports. All that effort creating a budget and tracking spending and income is pretty much wasted if you don’t look at reports of your budget compared to your actual spending and income.

Remember: The purpose of a budget is not to see how competent you are at predicting the future! The purpose of a budget is to help you make better money choices over time.

The pertinent question we ask ourselves when reviewing our monthly budget report is “Why did we spend $X more on [fill in the blank] in May than we budgeted?” Often the answer is about timing. “Oh, we’d planned to buy a new lawnmower in April but we actually got it in May.” So big deal. But often the answer gives us information we can use to make better money choices.

Ms. MC: “We overspent our dining out budget by $125 last month!”
Me: “Well, we had out-of-town visitors, and we went out a lot.”
Ms. MC: “Oh yeah. Maybe we shouldn’t eat out this month.”
Me: “Okay. I don’t like restaurant food anyway.”

Or then there’s this:

Me: “Why do you suppose our electricity bill was 50% higher last month?”
Ms. MC: “Well, when I checked our rental apartment last week, the tenant had left the electric fireplace, television, and lights on when he left for the day. I think he’s been doing that every day.”
Me: “Okay, I’m kicking his ass.”
Ms. MC: “I asked him to be a bit more conscious of that sort of thing. He said okay.”
Me: “I’m still kicking his ass.”
Ms. MC: “Do you want to go to jail again?”

These moderately fictitious examples are to make a point: Our budget reports tell us when reality differed from the assumptions we made when we settled on our budget. And with that information, we can make changes, or sometimes we just decide that there’s nothing we can or want to do differently and carry on.

To me, not having a budget, not tracking income and expenses, and so not having reality vs. budget reports would be like driving blindfolded: You just keep going and hope for the best.

Also, it’s useful and I find a lot of fun to go back and look at how you spent and earned money 10 or 15 years ago. I did all the research on our historical health insurance spending you read in Our 3 Best Money Choices—#2 by rummaging through our Quicken file.

How About You? Are You a Budgeteer?

Do you plan, budget, and track? Why or why not?

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