Everyone knows that budgets are sexy. It’s not just J-Money over at www.budgetsaresexy.com that thinks so. Everyone in the Personal Finance community will attest to that. OK, so they might not use the exact term sexy, but we can all agree that they are one of the most useful tools in any personal financial planning. According to an article in Forbes, it was suggested that the Renaissance astronomer Rhaticus once said that “if you can measure something, then you have some control over it” or as the common phrase goes, “What gets measured, gets done”.
Businesses use financial plans to predict turnover (income) and expenditure resulting in profit calculations. Why wouldn’t we as a little human business striving towards the same goals as any business do the same. We both want to have more money coming in than going out.
From the moment I started focusing on my personal finance, I was using business tools in anyway possible. From creating an income and expenditure sheet to using cash flow forecasting to determine timescales on debt snowballing, I used them all, and to good effect.
The simplest, most effective and fundamental element is a budget. So before I get into my Financial Independence calculations, here is my Budget, unadulterated, as I use it every week in my (most probably over complicated) spreadsheet. I must admit, I’ve became a bit obsessed with this and I love it. I enjoy seeing how each decision I make affects my whole budget and how they can all mean something.
My salary here is after I have paid 8% towards my pension. I started paying towards my pension late. Very late. looking back, I can’t believe (you will probably hear this a lot from me) it took me so long to start putting in considering my employer kindly matches my deposits up to 8%. Woah, free money? Easy decision. One problem with this is that I can’t get my hands on this stash until I’m 55, which means if my FI age is less than that, there will be a shortfall in my calculations.
I do actually earn interest from accounts with my cash savings in. I have them listed out but I have not put a forecast income against these. My reasoning behind this is that some of my cash savings will disappear at some point, thus loosing the interest. These are stoozing of a credit card, emergency fund, car savings, holidays and gifts. If these vanish along with their income, I don’t want them affecting my monthly investment amount that I’ve established. It’s also a good psychological win for me when i think I’m going to overspend slightly and these come in and perk up my income.
I have descriptions in with no value for Sold Stuff, Cash Back and Other. I track my income alongside these target budgets each month/
I also have a forecast income item for any abnormal income items that I need to take account of but don’t apply to a category until it’s been realised. It helps me plan for the month and how I can mitigate any unknowns.
The elements I have split down here originated from my previous attempts at a budget and those included in Dave Ramsey’s book The Total Money Makeover. It feels like a long time ago since I read this and anyone out there starting to wonder about the world of personal finance it’s not a bad place to start. Lots of anecdotal stories and ‘case studies’ to show you what’s possible along with a mix of nitty gritty detail like the budget planning part of the book. I also took from this the idea of setting budgets based on a percentage of your income as you can see from my sheet. These have been tweaked slightly over the last couple of years to suit my needs.
My mortgage is a reduced figure due to contribution from the future Mrs Doffer. I know that we will need a bigger property once we start a family and I know this will be a struggle convincing my better half that maintaining my savings rate might be just as important. I’m sure I can keep you updated on this.
The rest is pretty self explanatory and I generally stick within these.
A few of the items go into a cash savings account. These are building my emergency fund, saving for a car, gifts, holidays and mortgage over payments. I bought my car with cash and the amount I save for Car Savings / Emergency Fund will ensure that I can afford both by November 2019 – my Emergency fund being filled by Oct next year. I know this should be filled before I invest but this is a risk I am willing to take.
My mortgage rate is a measly 1.69% at the moment so it works out better for me if I earn 3% interest in a cash account. Marginally, but it all helps.
The most important figure is now magically produced at the bottom which is what is left over for Investing; £978.62
This is what i will use in my next post to talk about how I calculated my timescales to hit my Golden Pot figure.
So there it is. Like Mr Cellophane I want to be as transparent as I can and really give as much detail as possible. I feel most inspired when actual people give actual details as it made me realise what could be achieved and where similarities may lie.