Are Budgets Important

Are Budgets ImportantIn my last post we discussed How Do You Run Your Finances? To keep that momentum going we will be discussing, are budgets important?

In order for a family to keep positive cash flow they have understand where they are spending their money and that is where a budget comes into play.  The story that follows details the road my wife and I took as we looked to establish our first budget.

As we entered into 2017 my wife and I were discussing our goals for the year, we realized that to be successful we would need some sort of a budget. We knew that establishing a budget would help us visualize how much and where we were spending each month. In addition, we also wanted to see some historical information so that we could accurately estimate for items such as gas, groceries and such.

In an effort to make our budget creation as painless as possible we turned to two tools; Personal Capital and Excel.

Personal Capital

To get started we generated a report in Personal Capital detailing our spending over the last 6 months (July – December). As we went through this drill we didn’t expect any real surprises as we thought we had a good handle on our spending. Well, we were wrong. Over the prior 6 months we had spent $4,033 on groceries or $672 each month.

Armed with this new found information we used the $672 as our baseline in our budget and agreed that we can easily trim that by $100 to $150 a month with proper meal planning.

To illustrate one more example showing we didn’t understand how much we were spending, as we dove into our finances we realized that we were also spending $528 a year on haircuts. This was for 3 people (myself and 2 sons) and each of us get a haircut once a month.  Our mouths hit the floor with this expense. This was one of those expenses we always over looked because it is essential to stay groomed. I would like to add that we decided to cut this expense all together and have my wife cut our hair since we don’t do anything difficult. Boom! An extra $528 saved every year!

As you can see, Personal Capital opened up our eyes to where we were spending our money and has helped us with our budget.

Excel Spreadsheets

In addition to Personal Capital, we also used an old fashioned budget template from Excel to put our monthly expenses in. This helps us project our budget for the entire year. Personal Capital is great but it doesn’t allow us to project for items that haven’t happened yet. For example, car maintenance, medical emergency, vacations and such.

By keeping the spreadsheet current each month with actual expenses from Personal Capital and our forecasting we can easily see if we are on track with saving for our investments, vacations and such. This also helps us easily plan for large purchase items as well.

Sample Family Budget

As you can see, if we didn’t go through the drill of creating a budget we would not have had our eyes opened as to where we were over spending. This has easily helped us increase what we are saving.

So let me ask you again, are budgets important?

Note: If you would like to use a template from Excel you can browse them here.

Are Financial Goals Important

Financial GoalsWhat is a goal? By definition, a goal is the object of a person’s ambition. Up until recently my family didn’t have any financial goals. As we discussed financial independence we quickly realized that we needed to establish a few goals so that we could be successful.

Our Story

One of the first things that my wife and I had to do as we started our path towards financial independence was to begin setting goals. Up until this point in our marriage we had never actually defined any clear goals. Generally we just agreed that we needed to save more money and left it at that.

The problem with this mentality was that we weren’t working towards anything so we never achieved anything. At the end of every year we did see an increase in our savings but we always felt disappointed. The worst part was that we went through this every year and never made any real changes.

Why didn’t we make any changes? To be honest, it was because we were content. We thought we were doing things right and by all account we were. We had an emergency fund, maxing out 401k, contributing to Health Savings Account (HSA) and so forth.

Moving Forward

Starting in the fall of 2016 I had some family circumstances that made me give this a second thought. The circumstances brought some perspective to my life. It was then that I realized that financial independence doesn’t have to start at the retirement age of 62 or 65, it can be whenever we want.

At this point we started making some small changes to our lifestyle. This included cutting expenses on things such as eating out, began moving money over to our brokerage account,  and most importantly we started discussing goal setting.

It wasn’t until January we decided on the following goals for 2017.

  • Create and use a monthly budget
  • Set a goal for how much after tax money we wanted to save for the year
    • Increased amount of money going to all savings accounts (ours and children)
    • Started contributing to IRA – max it out
    • Increased money going to taxable brokerage account
  • Increased contribution to our HSA – This grows tax free and will be important when we reach financial freedom as it will help cover medical expenses
  • Began saving the company stock that we get each year (will help fund items such as college for the kids)

These changes may seem small and insignificant but that is how the road to financial freedom starts. In addition by setting goals we can easily measure how we are doing and this will help keep us motivated.

**Update**

To show the power of goal setting we typically saved about $31,000 a year before we set our 2017 goals. This was spread between our taxable and non-taxable.

Now that we established goals, we are on pace to save about $66,000 between all of our taxable and non-taxable accounts. That is more than double!

So you tell me, are financial goals important?