Track Your Spending and Implement a Budget

You Stopped the Bleeding - What’s Next?

Ok, so if you’ve knocked out all the steps in Phase 1 of the MilitaryMoney.US Path to Financial Independence, you’ve successfully stopped the bleeding.  This is only the beginning! As with tactical combat casualty care, stopping the bleeding is a critical first step, but you need to stabilize next, and that’s exactly what we’re going to do in Phase 2.  

Track Your Spending

To really start controlling your financial future, you need a solid grasp on your cash flow.  In other words, you need to know how much money comes in every month, and how that money is spent.  There are a bunch of good apps for doing this - Mint is a solid, free one. But, call me old fashioned, I find a lot of these apps to be more of a distraction, at least initially.  So, here’s what I recommend:

Part 1: On the first day of the month, set yourself a reminder - either a daily alert on your phone or a nice, big sticky note next to your bed - “KEEP RECEIPTS!”  Every day for that month, when you buy something, stash that receipt away somewhere safe.

Part 2: On the last day of the month, gather any paperwork for money coming in (leave & earnings statement, civilian pay stubs, etc.).  Add up all the net income for that month (that is, after taxes and your TSP withdrawals) - only care about actual cash coming in right now.

Part 3: Gather up all your receipts from daily spending, plus any other monthly bills (e.g. rent, insurance, car payments, memberships, etc).  Divide all these payments into categories - I recommend “housing expenses,” “auto/travel expenses,” “groceries,” “eating out & entertainment,” and “other” - and make a list of the individual expenses underneath each category (Microsoft Excel and Mac Sheets both work for this, or just do it on a big sheet of paper).  

This is a powerful activity in financial planning.  Simply putting your spending on paper forces you to recognize where there are problems and is critical to taking the next step - controlling your spending.

Needs Versus Wants

Here’s the “fun part,” especially if you’re doing this with a spouse…  In each of the above spending categories, go down the list and examine each payment.  Ask yourself, is this a “need”, or is this a “want”? More specifically, ask yourself two, related questions:

Question 1: Did I 100%, absolutely need to spend this money?

Question 2: If I answered “yes” to the above, is there a way I could have accomplished the same objective for less money?  (Good example: Do I need to eat lunch? Yes. Do I need to spend $10 getting lunch out? No - bring food from home and you can cut that spending in half).  

As you go through this exercise, put an “N” next to the “needs” and put a line through the “wants.”  Now, add up all the needs both A) by category, and B) in total.

The Housing Rule of Thumb

As housing typically is our largest monthly expense, I wanted to call this out specifically.  Once you’ve added up all of your housing expenses, divide that number by your total cash coming in each month, and multiply it by one hundred.  This is the percentage of cash coming in every month that you spend on housing. Example:

Monthly rent: $1,000
Average monthly utilities: $100
Total monthly housing expense: $1,100 ($1,000 + $100)
Cash coming in every month: $3,500
Percentage of net income spent on housing: ($1,100 / $3,500) x 100 = 31%

Some people argue that this percentage should never be more than 30% of gross income (i.e. income before tax withholding and TSP deductions).  I’m going to tell you that, if you’re truly serious about financial independence, this percentage shouldn’t be more than 25% of net income (i.e. the actual cash coming into your checking account every month after tax withholding and TSP deductions).  Now, I also get that you can’t just change your housing expenses overnight - leases are signed, mortgages need to be paid.  But, life is long - as is the journey to financial independence. Moving forward, seek to achieve this standard, and you’ll be taking huge strides towards building your wealth.

Identify Your Excess Income

Back to the needs versus wants exercises, here’s the true sanity check, and it’s a simple formula:

Money Coming In - Total Needs Expenses = Excess Income (or Income Shortage).

If you have an Income Shortage, you need to go back to the needs versus wants exercise.  Bottom line, if more cash goes out than comes in every month, you’ll never gain financial independence.  Period.

If you’ve identified Excess Income, you’re on the right path!  Whatever that excess number is, write it down somewhere - we’ll tackle what we’re going to actually do with it in the next post.   

Implement a Budget, Minus Excess Income

Looking at how much you spent in each of the spending categories above, that becomes your budget for the next month.  If you spent $800 on groceries, plan for not spending more than $800 this coming month. Pretend that your Excess Income doesn’t even exist - it’s not real for now.  

Put it in Practice and Test it Out

With your budget in place, spend another month tracking all your spending.  At the end of the month, do the same exercise of adding all your categories of expenses up.  Have you stuck to your budget? Are there any more wants you’ve realized you can do without? If you need to tweak the plan, tweak it.
If you successfully executed the plan and spent within your budget, congrats!  This is a HUGE step towards financial independence.

Excess Income from this Test Month

If you successfully followed the budget, you have your Excess Income left over at the end of the month.  For this first month, move all of that extra money into your emergency fund.  We’ll cover a more detailed plan for Excess Income in the next post.

Questions?  Thoughts? Recommendations for another topic?  Let us know in the comments!

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