We hope you’ve read though and applied the advice we provided in The Budgeting Series. In that series of articles, we walked you through in a very detailed way how to prepare a budget. As a reminder, we covered the following:
- Why do you need a budget
- How to gather your information
- How to use a spreadsheet to project income and expenses for 12 months
- How to create your budget using our 33/33/33 approach
- Pitfalls to avoid
- How your budget links to your retirement goals
Hope you agree it is pretty comprehensive!
To assist you, we provided a sample spreadsheet that you could use that we call “Cari$ Sample Budget“. Even if you haven’t created your personal budget as yet (excuse me, why not?!), you can refer to our sample budget to follow along this article.
When you open our sample budget, you’ll notice that we arranged it very deliberately: there are separate sections for fixed payments and discretionary expenses. This is to help you understand your cost base, specifically what is:
- Fixed. These are relatively inflexible for the next year or so – for example, it is unlikely that you can move to a smaller house in 3 months from the date you decide to put yours up for sale
- Discretionary. These can be reduced relatively easily. We don’t mean bring to zero; we just mean they can be scaled down next month if you need to conserve cash
The spreadsheet is designed to generate certain charts (please note: you’ll need to email us for this version with the charts). The purpose is to help you “visualize” your finances. A mass of numbers could be difficult to interpret and it is usually easier to understand in chart form.
The first chart (called a pie chart), shows how your total income is being used, as shown below.
So the individual who provided her information spends 60% of her income on Discretionary expenses, 36% on Fixed, and saves 4%. As you imagine, the person was shocked when they saw the pie chart: they were only saving 4% of their income! While spending 60% on areas that could potentially be reduced!
If you compare this profile to our suggested target of 33/33/33, you would realize that this person has a lot of opportunity to rebalance their personal financial situation. When she looked at the details and thought about it for a while, she concluded it would take her about 2 years to make the necessary changes. This was an impressive result, because two years in your 40-50 year working career is really nothing. The point was, she immediately realized she could make small changes and get some big results.
Understand your expenses
The next two charts are bar graphs. They show what expenses are making up Fixed and Discretionary in descending order of size, meaning the expense type you spend the most on is the first bar, etc. The purpose here is for you to visualize what areas are taking away most of your cash.
The first chart shows your total expenses, meaning BOTH Fixed and Discretionary, so you could understand what makes up your total cost base.
So our brave friend is spending $42,000 of her income on “Fun” and “$39,000” on “Meals”. Again, she was shocked. When she checked the details, she realized that she could easily save $15,000 to $20,000 from these two areas by making simple changes to her lifestyle. Not a bad result from spending a couple hours to do a proper budget!
The second chart (below) focuses on “Discretionary” expenses. Why? because Fixed expenses by their nature are more difficult to reduce. Not that it is an impossible task; it just takes more effort and potentially longer to achieve. “Discretionary” expenses, however, can be changed more easily and quickly. It just makes sense that your focus on cost cutting should start here to get the biggest bang for the effort!
The analysis of our Financial Freedom Fighter’s Discretionary expenses, shows that her cost reduction opportunity is within “Fun and “Meals”, and she has already begun saving much more.
Truly a picture is worth a thousand words…well in our case, thousands of dollars!
So what are you waiting for? Email us, get the chart version of the Cari$ Sample Budget, and start visualizing your expenses and savings!
Have you tried “visualizing” as yet? If so, let us know how it’s going in the comments below!