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Teaching my kids – Part 12: Tracking your expenses and start budgeting

I will be writing some posts to try to educate my kids. I know they are still very young (5 and 8) but it is never too early to start. And they can read these blog posts later on in life 😉  (This is probably the case, because they don’t speak or read English very well at this moment – You got to love an understatement!).

This is another blog post to keep the “snowball of knowledge” rolling.

I think when you educate kids about money, they will benefit from it for the rest of their lives. Or as the saying goes: “What is learned in the cradle is carried to the tomb”. And to educate your kid is your responsibility as a parent.

This blog post is a post for my kids when they are a little bit older. I did not talk to my kids about this subject (yet).

Most of us could probably say that if we knew then what we know now, we’d be in a much better place financially. So today I be writing a post about budgeting and tracking your expenses.

If you want to get your finances under control, you have to take action. There are two really important actions you have to take to get your finances under control.

budget

Tracking your expenses

The first action, to gain insight, is to start tracking your expenses.
This can be done by writing down every dollar you spend for a couple of months. Just use an Excel or Google spreadsheet and start.

To get a quick start, print out your last three months of bank statement. Go through each transaction, give it a name and put it in a category. Which categories you use, is completely up to you. Just to get you started I have put together a list of common categories:

  • Income
  • Mortgage/rent
  • Gas/Water/Electric
  • Local Taxes
  • Cable
  • Phone
  • House and Legal Insurances
  • Health Insurance
  • Car insurance
  • Gasoline / Transport
  • Food
  • Restaurants/Entertainment/date night
  • Saving/Investing

I know this part may take a little time, but this really helps you to get better insight.

After going through your bank statements start writing down every Euro you spend. Not only the big bills and cash payments, but also the small cash payments you make, for instance, in the marketplace. Keep doing this, and try to make this a part of your daily routine!

Once you have put everything you spent in categories for a couple of months, you will start to get a picture of where your money has been going. And maybe you get the same experience I had. I was surprised, and also a little embarrassed, about where large portions of my spending were going. Don’t worry and don’t be embarrassed, this is an important part of the process. Look at it as if it is a gift to your self. You are now taking the steps to get your spending on the right track and gaining insight. And once you have done this, you can take precise and meaningful actions.

Tracking your spending on a regular basis can be one of the biggest eye opening events on your way towards a more financially better life.  Many of us think we know where our money goes, but until you sit down and compile everything you spend, you will only see the financial picture that is actually there.

Budgeting

The second action is to make a budget. Budgeting is not much work, it is not difficult, but it must be done. It’s one of the best ways to organize and take control of your finances, but too many people don’t do this simple task. I didn’t when I just started working. I earned way much more than I did during my years at the university. And what did I do with this money? I really don’t know.

Okay now it is time write down your budget plan
And because you have already tracked your expenses for a couple of months, putting a budget together is relative easy. It can be done in just a small number of steps.

First make a list of all your income. Think of your paycheck or other benefits, but also any extras, the tax refund, holiday pay, interest and dividends. This is your total net income. If something will change in the future, you can always adjust your plan accordingly. By doing this you have filled your left side of your budget.

Now it is time to put together the right side of your budget. So after you have written down your total net income, start writing down all your fixed expenses. I suggest using the same categories as you have in your tracking spreadsheet. Your fixed expenses are these expenses you have to pay, you can’t do much about them (actually you can, but for now I leave it by this). Examples of fixed expenses are:

  • Mortgage/rent
  • Gas/Water/Electric
  • Local Taxes
  • Cable
  • Phone
  • House and Legal Insurances
  • Health Insurance
  • Car insurance
  • Saving/Investing

As you can see I have written down saving/investing as a fixed expenses. I strongly believe in paying yourself first (read this great post about it: First thing first). Or as Warren Buffett said:

Don’t Save What’s Left After Spending. Spend What’s Left After Saving.”

Your third step is to write down the categories of your variable costs. These can, for example, be divided into the following categories:

  • Food
  • Gasoline / transport
  • Gifts
  • Restaurants/Entertainment/date night

Write these also down on the right side of your budget. These are expenses you can do something about.

Your fourth step is to calculate the total height of your variable cost by subtracting your fixed expenses from your total net income.

And your final step is to make a priority list. Write down the amount of money you like to spend on every category. In this step you have to make choices. Do you think it is important to eat out that much? Is your weekly entertainment very important to you? In this step you can use your freshly gained insight from tracking your expenses. If you haven’t tracked your expenses for 1 year, don’t forget the payments you only have to make once a year (e.g. insurances).

And divide your total available variable cost over all the variable cost categories. The trick is to spend relatively little on things that are not important to you and spend more on categories where your priorities lie.

After you done all this you will have a closed budget. A closed budget is a budget were the total net income equals the total expenditures (fixed and variable). So congratulations you now have a budget. Try to stick to it!

Hold on, you’re not done yet. Now it is important to keep a close eye on your expenses and your budget. Every month take some time to see how it went. Have you stayed within your budget? Was it easy, than maybe you can adjust the amount downwards (and have some extra money to save 😉 ). Or was your budget too small and you can’t do anything about it? Then adjust your budget upwards.

When you want to adjust your budget on a category, than you also have to adjust another category (if one goes up, an other has to go down – simple as that). This because you have a closed budget.

Tracking your expenses and seeing how much you spent in each category allowed you to re-align your spending with what you find important, and cut out the frivolous spending on stuff that was not important to you!

I can say from my own experience that though it may be disheartening at first, you will enjoy knowing where your money went so you can re-direct it towards your goals. And yes some months you will over spend on a category. This will happen!! Don’t freak out. Take some time to reflect and investigate what happened. With this knowledge you can take action (stick with the budget or adjust).

But always remember to spend less than you make!!

Goals

When you do this, you can start to think about setting goals. And these goals you can than incorporate in your budget (on the variable cost side). The best way to set a goal is to start at the end. Or as Covey said:

Begin with the End in mind

If you want, for instance, a new computer which is around € 1,500 and you want it next year, then you can put this goal in your budget. You need to save €1,500 in the next 12 months to go out and buy your new computer. If you do the math, you would need to save € 125 a month for the next 12 months to have the funds needed to buy this computer. Easy!
And because this computer is a goal, you have to cut on some other categories of your budget.

If you follow the above steps you will guarantee get a better financial live. Just start!!

This is my twelfth blog post about teaching my kids. I hope my kids at the age of say 18, have all the financial knowledge I’m having right now. This would be a huge advantage for them! And that’s why I started these blog post series.

Do you have a budget? And did you set goals? I like to hear from you.

And will you help me to get the “snowball of knowledge” rolling?

Cheers,

Pollie

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4 thoughts on “Teaching my kids – Part 12: Tracking your expenses and start budgeting

  1. Pursuit 2 Freedom

    I really like the series Pollie! Very informative and the idea is great. We keep track of our expenses every month, but we don’t really use a budget. We just think with every purchase “does this make us happy or not” and than decide to go for it or not.

    But working with a budget could give new insights I guess!

    1. admin Post author

      Thanks for your kind words!
      Before I started my budget, I thought I new exactly where my money was going. Well I was in for a big surprise 😁
      It was shocking to see how much money went to small things. A couple of euro’s for a lunch, couple at the marketplace. All the little amount really add up.

      Cheers,

      Pollie

    1. admin Post author

      Well, I never thought about this. I think it is a good idea.
      MY Bank here in The Netherlands (Rabobank) already has a tracking your expenses addition to your bank accounts. SO it is just a small step to tie the budget to it.
      We just have to wait and see

      Cheers,

      Pollie

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