Wednesday, May 8, 2013

Budget insights, aka the financial clueX4

Had a conversation with a friend today during which I came to realize something that kind of just happened as part of a process, but that has been a huge part of making our budget work. I thought I should share that one, but a bit of background first:

Our household budget is currently US$ 17,500 a year. That's after taxes, net money going out for the necessities. Housing, food, clothing, utilities, transportation, in short, the basics.

We live in a rather nice, middle class neighbourhood, own our home and have a scant acre of land; as do most of the homes around us; so we have some options not everyone has when it comes to how we can go about this, like having a garden and planting edible perennials that will not bear fruit for a few years.

I have said this before, and I think it is important to include this little tidbit of information, that the budget you see me talk about is not our household income, but what we have been able to reduce our expenses to. We did this over the course of a few years and for several reasons:

1. We want to be debt free, so the more money we can throw at our debt, the better for us. Money not spent on essentials can go toward that

2. We want to retire at some point (don't we all?), so once the debt is gone we don't want to increase our spending (the cuts we have made are not painful, so why change things?), but rather throw all available cash at retirement savings (in addition to what we are doing now)

3. I really am not kidding when I say that Scrooge McDuck was my childhood hero. I never understood Donald and frankly thought that Mickey was a jerk. Don't get me started on Minnie or Daisy

4. We wanted to not only be sure that we could pay the bills on one income, but pay them comfortably and without worrying. $17,500 net requires us to have a pre-tax income of $23,334 a year, which equates to somewhat less than an hourly wage of $11.50, not an unreasonable expectation for mid to late career college educated adults. We are comfortable with this level of expense and think we can maintain it.

The thing is, we went from spending a bit more than $65,000 a year to $17,500 within less than two years. Sometimes I think about that and I am just amazed, 'cause I have no idea how we did that.

Yes, actually, I do:

  • We re-financed the house a few times to take advantage of lower interest rates.
  • We shopped around for car and homeowners insurance to get the best rate and we check that rate every 6 months or so. We could squeeze this one more, but having full coverage on our vehicles is important to us.
  • We squeezed the cell phone bill to see if it would bleed, turns out it does.
  • We use a credit card for running expenses, pay it off at the end of the month and cash out the points. I spend some time each month looking for point deals, because pennies count. Quadruple points on gasoline? Yah, sure, you betcha!
  • We don't heat or cool the house excessively, and keep the temperature in the house at about 60 in the winter and about 75-80 in the summer, we don't run the central heat or air conditioning at all if the weather allows for open windows, for us that is anywhere between 45 degrees at night to about 90 degrees during the day. And even then, I open and close windows and curtains to minimize heating and cooling and use the fireplace heater and fans as much as possible
  • I absolutely refuse to waste food and feed us by averaging less than $1 per serving. You'd be surprised how well we eat on that budget ($21 per person, per week and I buy the chicken food out of that). And yes, it means I cook from scratch and preserve leftovers and surplus whenever I can.
  • Over the course of the last 3 years I have slowly build up balances on my utility accounts, so that I am about a month/month and a half ahead on those bills and have put us on our own 'budget plan', meaning that I pay the same amount every month, regardless of what the bill says. Some utility companies offer this service, but I found their amounts are significantly higher than what I have found to be our average, so I do not recommend this. Do your own math and start paying a bit more every month ($5, yes, you can), so that if you are tighter than you expected one month the lights stay on without late fees.
The bit that I had a moment about today was this: 

I consistently went over budget when all of our money lived in one account. And I mean consistently, every month. I tried going with cash only, that didn't work, I tried giving us allowances, that didn't work, we fought about it, we discussed, we brainstormed, we promised, we committed to each other, we tried, we failed and failed and failed... until we split some accounts and it worked and has been working ever since.

We now have 2 checking accounts, 2 savings accounts and a credit card we pay off every month that we use to compartmentalize the budget. 

When I have to go online and actually transfer money out of the vacation savings account (that is what it is called on my online bank screen) to cover that months grocery card (that's what that one is called), you know I take a long hard look at why we went over budget. Sometimes it's because I got a really good deal and stocked up, sometimes it's because I got lazy and bought bread instead of baking it myself. Guess which one makes me cringe. Oh, and because *I* would want to know this: Any surplus I can squeeze out of the grocery budget goes into the vacation savings account, that's why that is the one I draw from when I screw up, and it also serves as my motivation to be extra frugal. 

Yes. I trick myself into being frugal and sticking to the budget. It works. Don't judge. 

That's all I have for now,
Happy Pinching

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