Today is my labor day, since I didn't take labor day off! I have been running errands all over town in the rain, but now for the fun part of catching up on my life - reviewing my budget for the last couple of months.
I use an online budgeting software, but if you compare bank account offers, you may be able to find a bank that offers a budgeting services built into your bank account website.
I keep an eye on my budgets all month, but about every three months, I sit down and put all categories into a spreadsheet so that I can compare month to month how my spending is changing in each category. I can tell you one thing - if you're trying to cut spending, do not get a dog and most certainly do not get a second dog! Looking back over my spending, I can see that, on average over the last year and a half, I have spent about $300/month on my dog. I have only had the new dog for a couple of months, so we'll see if my average spending increases significantly after a year of two dogs needing to go to the vet!
Why do I spend all this time identifying exactly where my money is going? Well, partially just to figure out where my spending could most easily be cut, but also to keep an idea of the minimum I would be able to live in - and to keep an eye on my lifestyle inflation by constantly comparing my spending to prior years!
A good rule of thumb for how much you need to be able to retire is to have enough in the bank to cover 25 times your current annual spending. That means that you need to withdraw about 4% of your money each year to live on, and hopefully capital gains will replace this 4% each year. That way, once you have enough to be able to live on 4% of your savings per year, you can retire for an indefinite period, without needing to worry about guessing how long you will live! So, if I spend $30,000/year, I need $750,000 in the bank to retire.
If I can figure out if it's possible to cut my spending to $20,000/year, I would only need to save $500,000 and could retire much earlier!
In case you're interested, these are the categories I use when looking at my spending:
- Food (groceries and eating out)
- Car (gas, car insurance, and maintenance costs. To get an idea for what it costs me to own the car.)
- Dog (food, vet visits, everything.)
- Health - things not covered by insurance or paid out of HSA
- Shopping - clothes, books, hobbies
- Other - this category is reserved for infrequent purchases - such as paying taxes or taking a trip.
- Home - garden
- Home - home improvement
- Home - furniture
I also include a category to track my spending to pay down my student loan, but I don't include this in my monthly expenses comparison, since this is not really an expense - and the more I pay now, the better!
Do you have a system for tracking your monthly expenses, and do you periodically review your past months and compare to current spending?