Budgeting on an annual basis — what an eye opener

Part of buying a house is getting a mortgage; part of getting a mortgage is figuring out what repayments you can afford; figuring out what repayments you can afford requires budgeting; and to make a budget, you need to figure out what you spend already.

I use a program called Gnucash to track our spending. I export statements from internet banking, and Gnucash sucks the data in and categorises it.

Now I often run reports on a monthly basis in Gnucash, but there’s an obvious thing I should have been doing but only just thought about now.

Obviously, there are a lot of expenses that only happen once a year, like paying our insurance premium. And there are other expenses that are irregular, even though they’re certain, like holiday spending, or going to the doctor. So the right way to work them out for a monthly budget — we both get paid monthly, so that’s the best way to work it out for us — is to total expenses over a whole year, and then divide by 12. Or maybe even over two years, and divide by 24.

And what a sickening revelation that was. It turns out that there are things that I think of as “one-off” that really are recurring expenses, just not frequent or regular ones. For example, we spend quite a bit flying around the place visiting friends and relatives. I drink a lot. I buy $40 of books every month, on average. And so on.

The only comfort is that our grocery bill tells me that I am a supermarket ninja. We eat well on only $125 per week, and that includes a fair amount of wine and a teenage girl 12 weeks of the year. But apparently I have a long way to go in other departments.

I do sort of have a system for irregular stuff. I have an account called “bills” and put a fixed amount in it every month, and pay all the bills out of it, so if some months we spend less, there’s a buffer building up for the months when we spend more. But maybe it’s time to actually do a real business-style budget, with a forecast for the coming year, and a monthly update to track actual spending against the forecast.

As always, your suggestions on budgeting for irregular, infrequent things are welcome.

Recording every damned thing

A few years ago I was contracting rather than working for a salary, and I started keeping basic books. I used Gnucash to do it. Gnucash is a very sophisticated double-entry accounting package, but reasonably easy to learn to drive.

Ever since, I’ve been tracking my expenses in a rough and ready sort of way. I can tell you what our power bill was last winter, and for several years before; how much I spend on coffee; and all the money Infratil has ripped off me through parking at Wellington Airport. This has been easy because Gnucash can import my online banking statements, and if I assign a transaction to a category, it’s smart enough to remember who the payee was and automatically put all subsequent payments to them in the right place.

However, there is a hole in my system: cash withdrawals. Some things are easier or cheaper with cash, so I regularly withdraw $50 or $100 (big withdrawals minimise ATM fees). But up until now, I haven’t anything but vague intuitions about where it goes. This bugs the hell out of me, to tell the truth: where did that $50 go? What do I have to show for it? I don’t know.

A couple of weeks ago I got a book out of the public library*, Your Money Or Your Life. I’m going to be writing about it more in coming weeks, but for now, I just want to mention one practice from the book: diligently recording every purchase. Every one. For the last two weeks, I have been noting all cash purchases, no matter how small, down to the cent, in my cellphone. This is not as hard as I thought. I almost always have my phone on me, and it’s already become a habit. $2.90 cheese puff, $15.40 taxi, and so on.

The funny thing is, judging by my cash withdrawal rate, I’m already spending less, purely because I have become more conscious of the money leaving my wallet.

The authors of Your Money Or Your Life want you to account for all your spending for more elevated reasons than just reducing your expenses. The idea is that after a month, you categorise all your spending and then rate the categories of expense, thinking about how much satisfaction you have derived from each category. You can then make decisions about whether to rebalance or reallocate your spending, based on your new understanding. Most of us spend the biggest part of our adult lives working to obtain money; that money represents stored time; the book wants us to consider whether we are getting enough happiness in exchange for it. I have yet to complete that part of the exercise, but I will, and when I do, I’ll post about it.

BONUS LIBRARY TIP: thanks to my friend Sue, I’ve become a convert to Library Elf. You can hook Library Elf up to your library card, and then it will email you before your books are due back, thus helping you to avoid a fine. Every frugal person should use the library instead of buying books, and avoiding fines is definitely frugal. The Wellington Public Library has no reminder service at all; I’ve always wondered whether this was a revenue gathering strategy…