We have the budget. Now let's analyze.

September 6, 2013 9:26 AM

Last year, my SO posted this question about making a budget for our family. Your answers were very helpful. August 31 was the last day of our first budget year, and we did pretty well. But we wondered what are good ratios or metrics to gauge just how well we did and where we need to improve.

So, we made our budget with some input from you. The allowance thing was very worthwhile, and our discretionary spending is way down. We never got our act together with travel, which came from a sidepocket and wasn't really tracked. For the rest of our household expenses, with a few exceptions, we took the pre budget actual numbers (from the 12 months leading up to 9/12), reduced them by optimistic amounts, maybe 10 or 15 percent.

We did pretty well. We were over the targets, but the targets were just kinda made up. Our total outflows were about 4% over the total target, but the total target was 10 or 15% below the previous year, so let's just say we cut expenses by 10% I think we got better with expenses as we went along, so I think we'll continue to go down so more this year.

We were already good at saving, and we socked away a bunch more.

Now that we have this data, what should we do with it, and maybe what can we use to help keep us on target to save even more? For instance, I know there are some ratios about housing costs, rent/mortgage to income (or salary?) but I don't remember what they are. I'm also thinking of stock analysis, with all of its ratios: p/e, quick ratio, and so forth.

Right now we have charts with gross assets/liabilities/net assets and track each category versus the prior month and the start of the budget. We don't generally track something like household expenses versus total expenses, or budgeted items versus total outflows (since some things are not budgeted for). And we don't really keep a running track of where budget items are (like "as of November, we're 8% over target on groceries, but electricity is 2% under target"), but partly because some of the costs are pretty seasonal: gas in winter, electric in summer in particular. We don't have credit card debt, just some student loans, so interest versus income is not really relevant. Groceries versus gasoline? Square root of internet minus Netflix?

As mentioned last year (and I'm sure you can tell :) ) we love love love spreadsheets and planning and saving, so anything you can think of is great!!

posted by 5845(f)(1)(D) to Work & Money (4 answers total)

I use mint to track my finances, and like to look at how things are changing over time, both as a whole and seasonally. I don't think ratios are going to be terribly helpful (gas vs. food, etc.), since most of that will differ from person to person based on jobs, commutes, priorities, etc. Look at what you're spending and when you're spending it and ask yourself a few questions:

Are you spending a relatively large share of your income on things you don't care much about? For example, if you love food and are spending a large share of your household income on food, fine. But if you don't care much about what you have for lunch every day but are spending a lot of money on lunches, it may be time for a change.

Look for big spikes in your expenses. Were you able to plan for those in advance? If it's something like a vacation you planned and saved for, great. If it was an unexpected expense that surprised you and forced you to dig into an emergency fund, take a look at how to avoid that position in the future.

If you're curious about how people tend to allocate their expenses by category, take a look at some suggestions.

Finally, if you want to reduce expenses, take a look at your budget and look for easy fat to cut. Restaurants and entertainment tend to be the easiest categories here, but sometimes transportation has some fat to cut as well (e.g. taxi vs. subway, etc.).
posted by craven_morhead at 10:11 AM on September 6, 2013 [1 favorite]

One interesting thing I do with my budget is set a "savings goal", then enter my expenses for each day and automate calculation of "average spend per day", "projected total spend in the month", "perfect desired spend per day", and "dynamic desired spend per day".

Perfect desired spend per day = average spend per day that will get you exactly to your savings goal.

Dynamic desired spend per day = average spend per day that will get you exactly to your savings goal given spending in the month thus far.

So, instead of "crap, I'm 8% over my budget for the month (or food, or whatever), I should cut back", "it's crap, I've spending $45 a day on food this month and now need to spend $20 a day to reach my savings goal." This lends itself to more tangible action steps. You need to be able to mentally parse spikes in spending (e.g., big grocery day, buying a plane ticket, etc.), but this gets really useful towards the end of the month.
posted by 3FLryan at 10:50 AM on September 6, 2013 [2 favorites]

When you are deciding what areas to cut, don't just come up with a percentage. If you were 4% over for the year, that means you have to trim X dollars out. Find specific ways to accomplish that. "OK, we need to knock $1000 off of our yearly spending. That's $84 a month." Now you have a real number to work with, instead of the almost useless "well, just spend 4% less than we did last year on everything."

You did great to start out with. You made a budget, stuck to it and tracked where you didn't. Now, use that knowledge to adjust the budget for next year. The important thing is sticking to the plan. Once that becomes second nature, then you can get a little aggressive about cutting things deeper.

My own personal preference is to budget high for things that I have little control over (power, phone bills, tax increases, etc.) because then I won't have to worry about breaking the budget just because cable goes up $1 a month. I would WAY rather have an easy budget and find that I only spent 96% of it, than go over 4%. I probably spend the same amount of money, but the psychological win is huge for me.
posted by gjc at 2:38 PM on September 6, 2013 [1 favorite]

For the statistics part, if you both love spreadsheets and planning (like me) you might enjoy the simulator game nature of pretending your house is a business. Read an introductory accounting tutorial online, then make up a chart of accounts, general journal and general ledger and use them. I do that for my trips for work. I even make a weekly set of financial statements (income statement, statement of change in equity, balance sheet, cash flow statement). It's really tedious to do as a real job, but it's kind of fun as a hobby (if you're a spreadsheet kind of person.) Turns out, just doing that activates my game-playing nature and I find myself spending less money because I'm excited about making my "score" go up and my fake statements really impressive.

As for adjusting the actual budget numbers, it seems like the next step is to play the zero-sum shell game. Assume you're going to make the same money in the next 12 months. What part of the budget do you wish you had more of? (Remember, savings is an item.) Anything you want to add somewhere, you have to take from somewhere else.
posted by ctmf at 7:09 PM on September 6, 2013