Do you know where your money goes? I do, now.

How to hit your budget every month

I recently realized the way I thought about spending money wasn’t working.

This hit me somewhere around South Africa, but more on that in a minute.

Here’s the thing. Most of us, including me, “budget.” We divide our money into different categories and allocate an amount to each category each month.

Many of us even download an app to keep track of those categories. We then connect our credit cards and bank accounts to automate the tracking.

And then… we pretty much ignore the budget.

At least I did — until the end of the month, that is.

At the end of the month, I’d open the app and check on the status bars. Surprise, they were all always red! I’d promise myself I’d buy less coffee and fewer clothes the next month… and then I wouldn’t!

Maybe you can relate to my experience. So, why are we doing this? With all the time and energy we put into budgeting, how is it that we still don’t know, in the moment, if we can afford a purchase while meeting our financial goals? How is it we buy so many Acai bowls and Amazon 1-click orders we later wish we hadn’t?

I’ve come to the conclusion it’s because we divide our money into too many categories. So, this year, I got rid of categories for my money.

Let me back up for a minute and explain how I came to this conclusion. For that, I return us to South Africa.

Last fall, my wife and I took a career break to travel the world. During our 11 weeks on the road, we had a spreadsheet that told us exactly how much money we could spend each day. Across 75 days in 10 countries on 5 continents, we came within 1% of hitting our budget. And every day, we knew exactly where we stood.

I’ve never had that kind of a handle on where my money was going before. And I’ve been budgeting and using Mint for a decade! At the midpoint of our trip, in South Africa, I started thinking that maybe the way we were handling our money on the trip would also make sense once we got home.

So what changed?

The “a-ha” insight from the trip was that we didn’t distinguish spending by category at all. We made no distinction between food, clothes, activities, or any other category. Instead, we tracked spending by type, and decided there are only two types of spending:

  1. Fixed expenses
  2. Variable expenses

Rent or mortgage, car insurance, car payment, health insurance, utilities… these expenses are fixed.

Clothes, food, gadgets, Netflix, a Friday night out, a haircut, the amount you drive or take Lyft or Uber… these expenses are variable.

Fixed expenses are billed monthly, and mandatory. You can’t change your rent from month to month.

Variable expenses are everything that isn’t fixed. You can eat one less meal at a restaurant, place one less Amazon order, or cancel a monthly subscription.

On the trip, we used this insight to come up with the concept of an available daily spend — the average amount of money you can spend each day on all of your variable expenses. Tracking this number was way more helpful than budgeting by category.

Here’s how to calculate your available daily spend:

  1. Determine after-tax income for each month.*
  2. Add up all your fixed expenses for a month.
  3. Decide how much money you want to save each month.
  4. Subtract the 2nd and 3rd items (fixed expenses + savings) from the first (after-tax income). This is your available monthly spend.
  5. Divide by 31 (days in a month; you’ll save an extra few bucks in shorter months). This is your all-important available daily spend.

* Unless you’re self-employed, this should just be adding up your household’s direct deposits over the course of a month.

So what’s the big deal with the available daily spend? The big deal is that this one number tells you what you can spend each day… on everything you might spend money on. And that is actually something you can take action on, in the moment.

As long as you have an app that shows you exactly where you stand against your available daily spend on a daily basis, you can easily decide whether to buy that new pair of jeans this week or hold off until next week. Same for a night out, or coffee, or going out to a movie, or any of the hundreds of other micro-decisions we make about money every month.

Aside from giving me a chance at actually hitting my financial goals regularly, this approach is turning out to be kind of fun! If you’re a competitive type that loves beating the target, it doesn’t get much better than knowing each day how much you’ve spent vs your monthly goal.

Of course, to put this in practice I needed a good app, so I asked my friends on Facebook for help. In my next post, I review a few apps they suggested and pick the one that works best with my new way of thinking about spending money.

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