At the start of every year going back almost 15 years now, I’ve laid out a projected expense budget for the Max Your Freedom household. I attribute much of my financial success over the years to this particular habit. I use past historical expense levels to project normal costs, and I try to anticipate other costs as much as possible.
This helps me plan my cash flow for the year, and set a savings target. Once that savings target becomes a goal at the start of the year, I’m like a guided missile aimed straight for it!
Before I start digging into the details around my 2017 expense budget, I just want to list out a few reasons why I think everyone should have some type of budget for their household.
5 Reasons why you need a Budget
#1 You are what you measure
It’s a very simple concept but it works like magic. Once you start tracking or measuring something whether it’s your weight, income, debt level, or expenses, it begins to magically improve. Most of the time we’re oblivious to how our money is spent, it comes in one door, and out the other just as fast.
The first question I normally ask someone living paycheck to paycheck is whether they track their expenses in detail. It always amazes me when the answer is no, which is more often than not. And this applies to both low and high income households.
Maybe it’s the engineer or business person in me, but I couldn’t imagine operating a household without understanding my overhead costs.
#2 Plan for the worst and hope for the best
A budget helps you come up with a plan for your money. If you don’t have a plan for your money it tends to spontaneously evaporate. With a solid budget for the year, you can figure out how much money should be left over (or not).
That helps you figure out how to cover shortfalls if you have any, and if you’re lucky what to do with any excess. It’s also really comforting to have a money roadmap for the year. That’s the best way to build up your financial confidence.
#3 It increases your odds of becoming financially successful
I have yet to meet someone who became financially successful without some form of budgeting, unless of course they started their life making high sums of money or with some type of windfall.
Having a budget, although it may seem tedious and boring, will never hurt you. Having one will only increase the chances of you taking control of your financial destiny. There literally is no downside.
#4 It leaves you with nowhere to hide
Once you start tracking your expenses and developing a budget, all the inconvenient truths about your spending habits are laid bare for you to see. That’s the scary part. The encouraging part, is that you can now look under that hood, and figure out what to fix.
My budget forces me to make decisions on what I should be prioritizing. In the early years, it forced me to tackle my debt head on. In the later years, it’s helped me optimize my spending so I can bank the savings in hopes of buying more freedom years.
#5 It reduces the odds of lifestyle inflation
Lifestyle inflation is when you increase your spending, usually as your income increases. It’s the primary reason why many high income earners (such as lawyers, doctors, celebrities, etc…) end up living paycheck to paycheck and with little savings despite their success.
Having a budget and analyzing it every year will quickly highlight if you’re on the path to lifestyle inflation. This doesn’t mean you can’t live a fulfilling and enjoyable life as you make more money. A budget simply gives you the right perspective on priorities during your journey.
My 2017 Expense Budget
Ok, now that I’ve either convinced you to start a budget, or reaffirmed your current habits, I can move on to what you’re really interested in.
What does my spending plan for 2017 look like?
I’m projecting our household to operate on ~$3,000/Month or ~$36,000/Year in 2017
Here’s the breakdown:
Property Taxes: $750/Month | $9,000/Year
This is now our highest expense for the year, since paying off our mortgage late last year. Unfortunately, we live in a high property tax state, and there is little room for improvement unless we move. Since we bought our house 8 years ago, we’ve managed to keep appraisal values relatively reasonable, and this cost under control.
Homeowner’s Insurance: $93/Month | $1,110/Year
This is another expense that’s hard to avoid, although you can shop it around once in a while to get better rates. I feel like I’ve optimized this one as best as I can given the coverage and region.
Here’s a pro tip on this particular cost: Make sure you’re not over-insured. Many people will get coverage for the value of their house. I only bought coverage for the actual cost to rebuild the house. I don’t need insurance on the land, which is at least half the value. That saves me quite a bit each year.
Electricity: $125/Month | $1,500/Year
We live in a ~2,000 sq. ft. home in Texas. The prior owners used to pay on average $300/Month on electricity (I asked for their utility bills before buying). Despite the summer heat, I’ve managed to reduce my costs by exercising good thermostat management, negotiating electricity rates every year, and efficiency improvements to the home.
Home Gas: $50/Month | $600/Year
There’s very little room for improvement here, and our winters are fairly mild in comparison to other regions.
Home Maintenance: $50/Month | $600/Year
I have someone mow my lawn and do general exterior maintenance throughout the year. I could easily get rid of this by doing it myself, but I feel like my time is spent better elsewhere (like this blog).
Internet: $95/Month | $1,140/Year
I cut the cord on cable for the first time this year (more on that later this week). My internet used to be bundled with cable and landline. I finally have it down to just internet, and I think there’s still room for improvement on this one. It feels like this expense is more like a utility these days. I don’t mind paying this much for 300 mbps for now.
Video Entertainment: $20/Month | $240/Year
We’re still suckers for good entertainment. There are so many great shows these days, and some distraction for the mind once in a while is a good way to de-stress. We have both Hulu and Netflix. And if it weren’t for Netflix, we wouldn’t have had the #1 restaurant on our radar for our trip this summer.
Auto Insurance: $90/Month | $1,080/Year
We’re insuring 2 cars currently, and I shopped the rate fairly hard over the years. So far Geico has been the best for us.
Auto Lease: $306/Month | $3,670/Year
I normally buy used cars cash, and don’t carry a payment unless there’s a 0% financing offer. I decided to replace my >10 year old car last year with a new electric car. I’ll have another post soon on why I decided to lease for the first time, so don’t judge me on this particular expense until you read it!
Gasoline: $80/Month | $960/Year
This is the cost to operate one of our cars each year. Since the other one is electric I get to avoid spending anytime at the gas station, and can conveniently “fill-up” at home. That costs me another $20/month in electricity which is included in the electricity expense mentioned earlier.
Cell Phone: $70/Month |$840/Year
This is the cost of my wife’s cell phone. Mine is covered by my company.
Food-Groceries: $400/Month | $4,800/Year
This is the cost of our groceries for a household of 2 adults and 1 young child. We eat at home 5 days a week, and eat out 2 days a week. It includes alcohol.
Food-Entertainment: $400/Month | $4,800/Year
As I said, we like to eat out a few times during the week. This is one of our indulgences, where we loosen up on the budget. We like to check out new food venues around the city, and enjoy doing so. This could easily be cut if needed, but it goes against our philosophy of balancing frugality with enjoying the journey.
Gym Membership: $70/Month | $840/Year
We’re not using this as much as we’d like, but it has some perks that make the cost worth it. This gym hosts a parent’s night out twice a month for free on Saturday nights. Our daughter loves going, and we love the opportunity for a date night. We don’t take advantage of this as often as we’d like , but when we do it definitely makes up for the cost.
Child Related: $330/Month | $3,950/Year
This covers the cost of after school care for my daughter. Since we’re both working, she gets to spend a couple of hours after school playing with her friends and doing fun projects. This also includes one activity per year. This year it’s Karate, which she’s really enjoying.
To summarize again, I’m projecting our household to operate on ~$3,000/Month or ~$36,000/Year in 2017. That equates to a Silver Package Lifestyle, which I feel is quite reasonable.
Keep in mind that this is well under our average of the past 10 years, which was around $50,000/Year due to our mortgage cost.
I didn’t include our travel expenses in the above section because I consider that to be non-operating expenses for our household. I also kept it separate because it skews the picture quite a bit.
Travel Cost: $1,250/Month | $15,000/Year
One of our major goals over the next few years, is to spend each summer in a different region. I estimated this summer to cost ~$15,000 for our 2 month stay in Barcelona Spain.
This is more than 2-3 times what we would normally spend on travel in a given year. And the best part is that we won’t even feel the impact on our budget! This is because our historical Gold Package Lifestyle budget has always been ~$50,000 per year.
We basically swapped our mortgage cost for travel and kept the budget flat in the process! In fact we’re saving a bit of money since our mortgage used to be $1,570/Month.
Our total budget for 2017 is set at $4,250/Month or $51,000/Year. Any income that’s made above and beyond that amount is promptly banked into savings or investments.
Since I know my budget, and know my income, I can practice one of the most repeated rules of personal finance: Pay yourself first. Every month when a paycheck is deposited, I move it immediately out of my checking account and into my savings account, BEFORE paying any other expenses. This forces me to work within my budget each month.
Although I keep track of expenses, I do so more loosely today because I already have that discipline built into my habits. There will be unplanned expenses and some leakage, but I have a sufficient buffer built in to account for it.
I used to be stressed out about tracking expenses and budgets at the beginning of my financial journey because of all the debt I was trying to eliminate. Now that I’m debt free I’m much more relaxed, and instead focus more on reaching financial freedom while enjoying life along the way.
Readers, do you keep a budget? Do you plan out the year ahead of time? Do you think a budget is important? Share your thoughts below!