Conducting a Personal Budget Analysis
2 Frugal Dudes
On this episode of 2 Frugal Dudes, we’re joined by our listener Mike Rollins as we tear apart his budget.
Mike Rollins is the self-proclaimed Maverick of drone flying– even if that means he occasionally crashes the drone into himself. Early into Mike’s marriage, Mike and his wife discovered Financial Peace University through an event at their church.
Since then, they’ve actively used the envelope system and stuck to the zero-based budget mentality. Mike is interested in trying Mint, but his current philosophy is preventing him from making the transition. Mike has been tracking his budget for the better part of twenty years following the same budgeting process; he has budget spreadsheets dating back to the beginning of his personal finance journey.
Looking back, Mike is shocked at how little he was once able to live on. His family’s only debt is their mortgage– no credit card debt– yet he doesn’t know where all of his money is going and what changes he can make regarding investments to prepare for the future. It’s a classic tale of make more, spend more.
The discussion surrounding a personal budget analysis started during a lunch meeting between Mike and Kevin, when meal planning costs arose. Mike has found the mentality that people shouldn’t discuss their income, expenses, and other personal finance issues to be a significant challenge in knowing what’s considered normal.
Mike used the traditional approach to the envelope budgeting process. The envelope budgeting process involves allocating funds to different budget categories– such as bills, groceries, living expenses, etc.,– and spending accordingly. The problem is that with digital spending, you don’t experience the same psychological response as spending physical cash and transactions don’t update instantly in online tracking.
In addition to using budget categories, Mike also has the traditional $1000 emergency savings fund. Additionally, there are a few investments for the kids’ futures and retirement.
Mike has both a 2007 and a 2012 vehicle in the driveway. Both vehicles have incurred maintenance fees over the past year, some expected, some not. These amounted to $6000 for the year in unexpected expenses. This means that Mike had to pull funds from his savings that impacted his long-term goals.
Another significant cost that Mike’s family experiences are clothing, as the three kids are growing at a rapid rate. This has caused unexpected expenses (such as replacing shoes twice within a few months). They also have approximately $500 in extracurricular activities for the children.
The recommendation from the 2 Frugal Dudes is to build up the emergency savings account based on the unexpected expenses that occurred with the vehicle maintenance. This might require re-routing some money each month that’s allocated for long-term goals into a short-term savings account that’s easy to access.
Rather than taking from the savings account for expenses like new clothing, the recommendation is to either allocate a bit of money each month and budgeting for the inevitable expense or reallocating some funds toward that expense. This helps avoid the temptation of using a credit card and incurring debt.
Set your kids up for personal finance and budgeting success by discussing finances and raising awareness. Rather than using terms like “we don’t have enough money” consider phrases like “we choose to spend the money we have this way.”
There are pros and cons to tracking your spending digitally versus manually. While manual tracking can help create more mindfulness surrounding your personal budgeting habits, it is also time-consuming enough that many choose not to do it.
Digital tracking with budget software is easy but lacks the discipline that helps people form great personal finance habits.
Kevin had to buy a new roof as part of one of the joys of home ownership. Fortunately, he was able to get more time than he thought out of the old roof and the cost was substantially less than he expected.
Sean accidentally paid too much rent while closing out his rental and got a $1200 refund check, which is always beneficial when moving.
Disclaimer: Kevin and Sean are not professional financial advisors. Do not take any advice they give without first speaking with a professional and performing your own due diligence.