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Hey Pen Pal,
First of all, your money check, despite the Blergs, was awesome — you’ve paid off a huge amount on your student loans this year. Does it feel like it’s picking up steam or still feel like really slow progress?
In my last monthly money check, I talked about how tracking my expenses in great detail isn’t worth the effort for me. The expense reports were interesting in terms of being money porn, but the truth is we don’t talk about basic expenses much at home. Mostly, we talk about priorities and we talk about large, lumpy bills. We don’t quibble about a $3 latte when we have a $24,000 preschool bill.
A couple fellow bloggers (Max, Mustard) commented that tracking expenses was useful for maintaining a baseline. I agree with this to a certain point, and maybe my disagreement with them is semantics. I’m more in line with Go Finance Yourself, who doesn’t do a detailed expense budget. Let me explain further by showing what I don’t do and what I do do.
Do do? Ha!
First what I don’t do. I don’t set a budget whereby I try to limit spending to a certain amount in each expense category. For example, I don’t have a budget of $500 for groceries and then get anxious when I spend $700. To me, that’s what people normally speak of when they talk about budgets. It’s a way of controlling spending behavior.
I can imagine someone doing this if they don’t have much leeway, or if they need to live on a tight early retirement income. I get that, and it’s a smart approach. I’m curious if this actually helps people control behavior or if it just describes behaviors they already have. At any rate, it doesn’t help me much. I don’t care about a few hundred dollars here or there as long as I’m paying the bills and regularly achieving my goals.
So here’s what I do. I maintain a cash flow timeline where I project my income and expenses a few months out. It looks like this (although this is a simplified example):
As you can see, I know how much is coming in and approximately how much is going out. I update the numbers when my credit card statements arrive. I also include money I’m setting aside for goals, like the IRA and the 529 plan. And I can see my final balance.
So let’s say I need to buy a car in late summer (which I do). When I look at my timeline, I can see that I’ll have $22k available. I want a car in the $15-18k range, so I’m prepared for that lump expense. If my balance starts to get tight, I can easily adjust by postponing an IRA transfer or something. Not a big deal.
Does that make sense? This does not seem like a budget to me. When I put $5,000 on my credit card, I don’t really care how much of it is groceries and how much is electricity and so on. The only thing I care about is if I have enough available cash to pay the bills, absorb the lumps, and set aside money for our priorities. If I can do that, I’ll meet all my goals, which I’ve set up ahead of time.
What do you think, is this a budget in disguise or something else?
Ok, enough of that. Let’s take a look at my Net Worth numbers for April and I’ll share some observations. Click on the chart for a better view.
So far this year, my net worth has grown by $12,550 per month. Outstanding! I won’t keep that pace, but I’m on track to meet my goal of $1MM at the age of 45.
I have 4 main categories that make up my Net Worth, and goals for each category. Here’s my progress report.
My goal is to pay the bills while maintaining a buffer in my checking account, around $7-10k. Cash held up nicely despite a huge tax bill ($9,000) and a 2-week vacation in Spain (will post on that soon)! Most of the Spain expenses, like air fare and hotels, had been paid for in previous months. I’m going to build cash over the summer to pay for our new (used) car. Mission accomplished.
College: Save $500 per month, increasing by $100 per month every year until I hit $1,000 per month. That’s $100k in 10 years. I just started. Mission accomplished.
Debt: I want to pay off my 0% debt by the end of 2017. Mission not accomplished, but not worried. I could roll it to another 0% offer. Starting in 2018, this category will morph into my Health Savings Account. I want to max the HSA out, which means I’ll save around $560 per month.
This is non-retirement investing.
LLC: My bothers and I started a company in 2009 and we invest in mostly farmland and commercial real estate. Every year at tax time, the valuation gets updated and the increase was more than I expected ($13k). My long term goal is growth. Mission accomplished.
Opportunity Fund: I have various personal investments that I’m winding down. I want to get more focused and think of this as an Opportunity Fund to pounce on … you guessed it … opportunities. I’ll start with $500 per month, increasing by $250 every year until I hit $1500 per month. That’s $150k in 10 years. Mission not accomplished. It may take a while to ramp this up.
Most of my money is here. My goals are simple — I want to max my contributions for both me and Mrs. R.
401k: It’s on autopilot. Mission accomplished.
IRA: The IRA accounts didn’t change much, but I base success more on my ability to save. Value will go up and down. I need to contribute around $1,000 per month, and I did that in April, so mission accomplished.
So that’s my overall money check — meeting goals and growing net worth. Expenses are pesky details.
The idea here is to focus on the process of consistent and smart money choices. If I can succeed in these categories every month, or just come close, the results will be excellent. I’ll be prepared for anything that comes up, and my net worth will grow. Focusing on the process is like what you’re doing with student loans. Paying off a huge amount seems impossible, but if you plug away every month, you can make good progress.
For some reason, looking at it this way, as positive progress toward goals and priorities, is much more helpful to me than tracking expenses.
What do you think Penny? How does tracking expenses help or not help in your case? Does it change behavior, or were you just frugal already? I don’t think I’m frugal at all but I am focused on my goals, which has a moderating effect on spending.