We’ve never had a budget. If I had to explain our previous financial strategy, it would go something like this:
- Max out 401k and HSA
- Regularly contribute to 529s
- Maintain 3-month cash emergency fund
- Have no debt outside of mortgages
- Buy whatever we want and always put it on a credit card
- Never carry a credit card balance and never miss a payment
- Move lumps of cash into after-tax brokerage accounts when excess cash available
- Use brokerage account for future large purchases or investments
According to our financial planners, we’d be set for retirement by 65 and be able to afford each kid’s tuition (not board) at an in-state, public university. This plan no longer meets our goals, so time for a budget.
This post constitutes our annual budget planning report. We’ll do periodic updates to see how we’re doing.
Hello, You Need a Budget. Regards, 2017.
Author’s Note: Despite this post being published in September, the budgeting process and decisions made took place in March.
2017 started off great for our family, but terrible for our finances. After 6 months of the most hellacious trip planning I’ve ever experienced, we took a week-long trip to Disney World. It was an amazing trip and a place we’ll return. But the happiest place on Earth also happens to be one of the most expensive.
I’ve always passively tracked our income, investments, and spending, but I rarely did anything about it. Then in January 2017, our expenses came in at $15,837, nearly topping our highest spend month the previous year. We followed that up with a $17,864 record-breaking February, exceeding our previous year’s average monthly spend by 50% and setting a two-year record high.
Based on our 2016 effective tax rate, if we maintained this level of spending, we would need to gross $260k annually just to pay for our cost of living. That’s $260k of pre-tax income and not being able to save a single dollar. Not good.
Motivated by the new-to-me Mad Fientist podcast and stories of those on his show, it was time to admit we had a problem.
Budget to Cut Costs, Not Happiness
Before we jump into our budgeting process, a tip to consider if our story resonates with yours:
The first thing you should do is communicate as a couple and commit to taking control of your finances. This is not something that one person in a partnership can tackle alone. It took us two years to realize an issue and commit to a change. You can read a little more on how we discovered our “why” in one of our first blog posts.
The purpose of our budgeting process is to understand where our money is going and to determine if corrective actions are needed. Our goals for this exercise are:
- Identify specific categories that we can target for a sizable reduction in expense without negatively impacting our happiness and lifestyle
- Setup a categorical, monthly budget and tracking system based on historical spend
- Identify and automate additional savings to retirement saving vehicles
We are out to cut unnecessary costs, not things that created fun and happiness.
Here’s how our first ever budget turned out at the end of the exercise compared to our historical monthly averages. This budget would decrease our expenses by about $2,500 a month. We’ll dive into each category below.
Examination: Roughly 80% of this category is principal, tax, and insurance. The rest includes: bi-weekly house cleaner, seasonal lawn care, furniture, and home supplies and improvement.
Assessment: No surprise that it’s our largest expense. We have a nice home and enjoy where we live. We’re not planning on moving or paying this loan down at an accelerated pace. February is exceptionally high because of an annual payment we make on a personal loan we took to afford a 25% down payment on our home. We were able to lower the interest rate on our 30-year loan from 3.75% to 3.375% by putting down 25%, which will save us $32k over the lifetime of the mortgage. The house cleaner helps our sanity and marriage. The lawn service is well worth it compared to the family time I’d lose on the weekends. The rest is just noise.
Decision: No change.
Budget: $36,000 annually, $3,000/month
Examination: 80% of this category is the principal, mortgage, and insurance on our rental property. The remaining expenses are associated to real estate or other small projects that we have going on. Expenses were higher end of 2016 due to some remodeling and repair work.
Assessment: We account for the costs of our investments in our monthly budgeting because we also account for the income from investments. I’d actually like to see this category grow, but also see the income from said investments grow faster. Our primary investment, the lone property, is cash flow positive at the time. So while Business Services is a sizable portion of our monthly budget, our net income is positive from it.
Decision: Cut budget to maintenance ($2,000) + mortgage (P&I + tax)
Budget: $21,600 annually, $1,800/month
Examination: 80% is from child care for two kids. Dance, soccer, gymnastics, swim lessons, and an occasional fun kid activity on a weekend makes up the rest.
Assessment: Child care is expensive, but worth it for us. We’re fortunate that we have so many incredible child care providers near us and that we’re able to afford it. The cost of full-time daycare is the same as full-time tuition at the University of Texas. Consider this:
- At a parent’s disposal to prepare for college costs: 18 years to save, tax-advantaged 529 plans, financial aid packages, and a child that can work a job for a few years
- At a parent’s disposal to pay for full-time child care: $5,000 (married filing jointly) of their income tax-free per year per family (not per child).
This is broken. Learn more at The Care Index.
Decision: Our daughter just started Kindergarten, so our September family finance update will show a decrease in the Kids category. But until then, maintain budget.
Budget: $24,000 annually, $2,000/month
Food and Dining
Examination: January and February by sub-category: 38% on groceries, 28% on restaurants, 19% alcohol and bars, 13% fast food. 62 transactions over two months at restaurant, fast food, work lunch, or coffee shop.
Assessment: This seems pretty high. Compared to a few of the other FI bloggers I read, we’re really high. Analyzing this category hurts…
- $631 on alcohol? <Jab>
- Actually, it’s more like $900 because $275 of Restaurants is mis-categorized <Body Blow>
- 62 transactions over two months at a restaurant of some kind. Once a day? <Upper Cut>
- How many times did we eat out all of 2016? 417! <TKO>
Decision: It hurts to look at these numbers. We need to cut. For starters, as much as we like good wine, we’re buying too much of it. We can get very good French, Italian, and Chilean wines from our local wine guy for a fraction of the cellar clubs we belong to. We also need to curb, not eliminate, our restaurant consumption. 417 transactions in a year is embarrassing.
Budget: $10,800 annually, $900/month
Examination: Jan/Feb is 100% from the Disney trip. End of last year seems more reasonable, but still a little high per typical. End of last year included two trips to Michigan, some personal expenses on top of two work trips, and a couples trip to Cabo.
Assessment: For a 7-night, 4-person Disney trip including airfare, on-property lodging, 5 days of park tickets, 7 meals with characters and princesses, and 2 happy kids, I’m good with the $5k expense in 2017. We regularly expect travel to be one of our larger expense categories. We love travel and family trips, and we’re geographically isolated from the rest of our extended family. We’ll need to budget for airfare and lodging.
Decision: Budget enough to accommodate our current travel routine based on previous annual travel expenses. We think there’s quite a bit of noise in previous travel as we didn’t regularly re-classify work expenses in the past. So we’ll shave a few thousand off past years.
Budget: $9,000 annually, $750/month
Examination: Consistent range of spend monthly. 40% at various shopping stores. 30% at Amazon. 20% at various clothing stores.
Assessment: This is a category that can and has grown very quickly when unchecked. 2015 and 2016 spend totals are up 70% compared to 3-years prior. Pretty soon we might just rename this category “Amazon”.
Decision: We need to force some discipline in this category. It’s simply too easy to buy things, and it’s only getting easier. I submit kids bop as proof:
Budget: $4,800 annually, $400/month
Bills & Utilities
Examination: Consistent range of spend monthly.
Assessment: Of the utilities I can shop around, I do. I think this category is already optimized. The exception is we still pay $127/month for TV. If Mrs. FI Exec agrees to switch to streaming services, we can save some here.
Decision: Cut the cord and the budget.
Budget: $6,000 annually, $500/month
Examination: 90% of Jan-Feb from forward purchase of football tickets for game in September. Annual expenses over past five years range from $450 to $3,500.
Assessment: Our historical spend is all over on Entertainment. This one is like throwing darts. With our kids getting to an age where they’ll want to do more things, we should budget on the high-side. We plan to sell four of the six tickets we purchased for the football game, which will reimburse the Entertainment category when that happens.
Decision: Set budget below recent trends, but on the high-side.
Budget: $2,100 annually, $175/month
Auto & Transport
Examination: Standard expenses throughout the year with larger annual and bi-annual expenses including insurance and repairs.
Assessment: Since a final payment in January 2016, we own our cars outright. Yet, we still spend nearly $400/month on average. Our 2016 annual expenses are tied up in gas (30%), insurance (20%), service (20%), tolls (10%), and public transportation (10%). Unless we make drastic changes, this category will not decrease. If anything, I expect an increase in 2017 as cars age.
Decision: No change.
Budget: $4,800 annually, $400/month
Examination: Nothing insightful.
Assessment: Uncategorized is basically Mint.com’s way of drawing your attention to certain expenses that it can’t automatically figure out. Since we’ve never had a budget to this point, we did not regularly go back and accurately categorize every single transaction.
Decision: Before we run our monthly family finance updates in 2017, we’ll spend a few minutes to make sure every transaction is correctly classified.
Examination: Inconsistent monthly expenses due to timing of vet visits. Annual breakdown is 60% vets, 20% groomers, 20% food.
Assessment: Mrs. FI Exec signed us up for a 12-month vet plan at the end of last year. It basically covers a few checkups throughout the year and gives us a discount on more expensive procedures – which inevitably always happen. I’ve never run the numbers to see if we’re saving or losing money on the vet plan.
Decision: Hope for a healthy FI Exec pup and take care of her when she needs it.
Budget: $1,200 annually, $150/month
Gifts & Donations
Examination: In 2016, a greater percentage when to gifts than charities, significantly down from 2015.
Assessment: Yikes, airing our finances on the website drew my attention to how pitiful our 2016 giving was. We were generous in other types of donations, but pure cash was low. 70% of financial giving last year was as gifts versus 30% as charitable. We do believe it’s important to help others, so this area needs improvement.
Decision: Get our own financial health under control in 2017 so we can increase giving in perpetuity in future years. Look for other ways to give and help those we want to support.
Budget: $1,250 annually, $125/month
Health & Fitness
Examination: Mostly doctor visit and pharmacy co-pays, glasses/contacts, and gym membership.
Assessment: The only variable expenses are medical related. Our gym expense, while discretionary, is consistent year after year. Our gym membership is also ridiculously cheap at $10/month. Expenses for the first half of 2016 were less than second half.
Decision: Cross our fingers and hope we can keep expenses low in 2017.
Budget: $600 annually, $50/month
Examination: Life insurance and jewelers insurance.
Assessment: Three annual expenses make up the spend in this category. His and her term-life insurance policies. Her jewelers insurance policy. We pay in full when due, but we’ll allocate the budget across months evenly.
Decision: No change.
Budget: $1,440 annually, $120/month
Examination: 45% dry cleaning, 45% haircut, 10% spa.
Assessment: This category is about as optimized as it can get. Dry cleaning is necessary for much of my work clothes, and I already drive across town to go to the same, bargain place for the past 10 years. For a family of four, getting by on $25 a month for haircuts seems like a steal. And if Mrs. FI Exec wants to spend 10% of this category on an occasional spa treatment, no problem.
Decision: No change.
Budget: $600 annually, $50/month
Fees & Charges
Examination: HSA savings and brokerage fees, and annual fees on select credit cards.
Assessment: We should be able to keep fees to a minimum. There are two types of fees we should see – HSA account fees and annual credit card fees. Since my HSA is no longer sponsored by my previous employer, I take on the maintenance fees. However, the growth on my balance and the eventual tax savings more than make up for the fees.
I closely manage which credit cards we have open, when renewals are coming, and which fees are due. If a card has run its course and a better one can replace it, we’ll close out cards to avoid fees. Over the years, we’ve had 41 different cards, currently maintain 19, 9 of which have an annual fee, of which only 5 we’ll keep open year-after-year.
Decision: No change, just minimize.
Budget: $240 annually, $20/month
Examination: School loan debt free since December 2013!
Assessment: No loans! No loans! No loans!
2017 Focus Areas
17 categories later, we have a budget. There are literally more categories in our personal budget than there are in my work budget. Luckily (and oddly), Mint makes doing our personal budget much easier than the software I use in the office.
If you’ve been following along, you may have noticed that most categories will have a flat budget – no change. This budget reflects our lifestyle, and per our goals, we’re not looking to change our lifestyle.
Instead, we’re going to begin tackling a reduction in expenses by focusing on one thing at a time. Our 2017 focus will be cutting expenses in our two highest discretionary spend categories – Food/Dining and Shopping. If we can achieve our budget goals for these categories, we should be able to shave close to $12,000 off of our annual spend.
There’s a lot of power in focusing on one thing to achieve results. An acquaintance of ours wrote a New York Times Bestseller on the topic. It’s one of my favorite books and can really help to transform what you are capable of achieving in work, life, and business.
Tracking Budget and Expenses
For an all-in-one view, we use Mint to track our budget, account balances, and expenses. We use Personal Capital to track our net worth and investment performance. We’ve used both of these free services for a really long time. According to our Mint profile, we’ll be celebrating our 10-year Mint anniversary on February 27, 2018. Which coincidentally lines up nicely with our 10-year wedding anniversary (January 26) and just 10 days after we returned from our 17-day honeymoon in Bali… Interesting…
By my calculations, there’s an 80% chance if you’re reading this, you use at least one of these services. If you’re not using Personal Capital, a) we definitely recommend it, and b) they’ll pay us an affiliate commission if you sign up using our link. You should use Mint, too. Their expense categorization, budgeting, and reporting capabilities are great. We don’t get a kickback from them.
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