Landon's Money Musings Newsletter: August 2022
Landon's Once-a-Month "Backwards Budget"
If there was ever a simpler time in personal finance, perhaps it went like this: you worked a day and went home with cash in your pocket. You stopped by the store to buy some food with the money you earned. When you got home, you put a few coins in a jar to save for the future.
Does that resemble your pay, spending, or savings? If you’re like most of my clients, all three of these areas are infinitely more complicated.
With pay schedules that do not always line up with the months, multiple streams of income, multiple credit cards delaying the reflection of your spending, and so many savings and retirement accounts you may not even have the passwords to, cash flow can be very hard to track.
When you can’t track, it’s hard to know what your average spending is. And without a monthly spending figure, it is hard to know how much you need to cover your expenses during an emergency, a sabbatical, or your retirement.
There are two ways to count your spending—counting up from zero, or down from everything. When people think of budgeting, they often mean the former - using an app or spreadsheet to tally each expense up, categorizing the expenses as they go. In an ideal world you would do both, but the latter is just as important, and it takes less time to do.
Let’s run through Landon’s Quick and Easy Backwards Budget.
Here’s the formula:
[End of the month balance] - [beginning of the month balance] - [income] = [Spending]
End of the month balance
Add up the balance of all of your cash accounts such as checking and savings on the last day of the month. Subtract the last day of the month balance of any credit cards. Exclude fixed-payment loans, investment and retirement accounts, property, etc. We’re just trying to capture the accounts that go up and down as you spend.
Beginning of the month balance
Now put together positive minus negative balances for the first day of the month.
Income
Add up net income from the month. If you’re an employee, this would be the amount that comes into your bank account. We’re finding all the take-home pay from that month. If you get a tax return, add it to this category. If you pay taxes out of pocket, subtract it from this category.
Spending
Again, you take the end value minus the beginning value minus your take-home pay. What you get is how much you spent in the month.
Note that you may need a more complex calculation if you're self-employed, or you are regularly moving money in and out of retirement accounts, selling possessions, or accruing debt.
I do this every month to get a little reality check on my family's spending. As time goes on, I'm able to recognize if a month was higher or lower than expected. I'm also better able to approximate how much we could afford to take on other expenses.
Try it and tell me what you think. Is your spending figure what you expected?