When it comes to budgeting money, we’ve tried a few different approaches.
First, we’ve tried not budgeting our money in favor of a “pay ourselves first” approach. We didn’t realize the value of maximizing our retirement accounts at the time, so we only contributed enough to qualify for employer matches. This left a lot of money to burn.
Second, we tried a “mindfulness” approach to spending in which we simply tried to increase awareness of our spending. We became especially mindful of our spending only when our credit card bills came in the mail.
Third, we tried tracking our spending using Mint and then setting up a monthly spending budget based on how much we spent. This is the approach we used in 2015, 2016, and 2017 to cut our spending and get out of debt, so it’s the closest we ever came to successfully budgeting our money. Based on the results, I’d say this was moderately effective.
While we managed to get out of debt in two years, we weren’t always doing our level best. Occasionally, we’d overspend or we’d go out to eat when we said we were cutting back. What we didn’t realize at the time was that we were robbed…by ourselves. And we didn’t realize it until we our trip to the Groovy homestead to talk trash, personal finance, and to enjoy the sights and sounds of Charlotte.
The Groovy couple is a living example of the principles outlined in The Millionaire Next Door and they’ve long served as a source of inspiration to us as we pursue our own dream of financial independence/early retirement.
On our way to our next stop in NC to visit my childhood best friend, Garrett and I had ample time in the car to reflect on our Groovy conversations. The topic of conversation? Budgeting (and a little investing, thanks to Mr. Groovy’s investment in lithium).
Seeing as how it was December, it was the perfect time to reflect on our 2017 spending, our budget for 2018, our retirement contributions for 2018, and our dividend investing strategy for 2018 so we could be like our Groovy friends (early retired!).
Annual reflections are one part of the continuous improvement process that helped get us to where we are today: Plan – Do – Check – Act.
I can’t say how many times we have gone through this loop, but those most recent iteration while we were on the road gave us a different perspective on budgeting and spending.
I grabbed my laptop and opened our household budget spreadsheet, which is how we keep track of spending over the course of the year. That’s when we started to do some real number-crunching unlike any we had before. Here’s what went down.
We took our annual household budget for 2018 and then divided by 365 days to get our average spending per day. Prior to this exercise, we looked at our spending for the month or the year, but never by day (except for that time I looked into Latte Factor returns).
daily spend for our 2018 household budget categories
We’re calling this approach “budget fractioning.”
|Budget Category >>||Daily Budget $ >>||Daily Budget % >>|
On average, we expect to spend about $93 each day in 2018.
Prior to this examination of our daily spend, we didn’t think anything of spending $20 at Chipotle on a lazy Thursday evening or $100 on dinner and drinks with friends over and above what we budgeted for such social occasions — we would just go over budget and that would be that.
Spending $20 at Chipotle (usually not in the budget) would be the equivalent of spending about 22% of our daily budget, making Chipotle the most expense line item in our budget.
Spending $100 at a restaurant on dinner and drinks would be the equivalent of spending about 108% of our daily budget — again, usually not in the budget. Yikes!
Let’s assume that one night a week we’re lazy (and going to Chipotle) and one night a week we’re hanging out with our peeps. We’re talking about $120 a week.
$120 x 52 weeks = $6240
Since we’ve been together about nine years, we’ll assume we’ve done this every year.
$6240 x 9 years = $56,160
I’m not even accounted for potential growth by way of investing. At the time, I didn’t realize the potential for our money if we had made mindful decisions and then invested that $56,160 elsewhere.
You live. You learn.
Since we’re on our last lofty financial goal, dividend investing for financial independence/early retirement, our daily personal finance decisions are what will make or break our ability to reach said goal.
Gone are the days that we look at our monthly budget at the end of the month and say, “Oops! It looks like we went out to eat and overspent AGAIN.” Budgeting fractioning made us aware of the impact our daily decisions have on our personal finances, for better or for worse.
If we choose laziness go out to a restaurant and outspend our daily budget by 108%, then we know we have fewer dollars to invest in our brokerage account, so we’re robbing our future selves of the ability to reach FIRE.
Now, I have NO problem going out with friends or on a date with Garrett. What I have a problem with is mindless spending that leads to going over budget. Budgeting fractioning helped us curb this habit in a BIG way in January. Case in point…
After going on a hike in nearby York County, it was nearly dinner time and we had eaten all of our snacks.
I exclaimed, “I want some lasagna!”
Garrett obliged and we started a search for awesome Italian restaurants nearby. Menu prices indicated that dinner would be at least $50 with tip, more than half our entire daily budget.
I know I shouldn’t eat a traditional lasagna for a variety of health-related reasons, but I also shouldn’t spend an exorbitant amount of cash on a couple of servings of lasagna when I can make a whole casserole dish full of the good stuff at home. So we went home, made dinner together, and we had a few more bucks to invest. Win.
Seeing our spending in terms of dollars spent each day was when money became really real to me. I like to think we’re 10Xing that whole Latte Factor thing while we blaze a path to FIRE. 😉