Forensic Budgeting

Budgeting is not an exercise. It’s a crime scene, and you’re the detective. Fortunately, all the evidence you need is right before your eyes.

I’ve recently noticed a few trends in my clients’ efforts to track and control their spending:

  • Using a budget worksheet remains a challenge for them because some have a tendency to omit certain items or categories, and many tend to “round down”. Let’s face it: who would estimate or admit that they spend $6,000 per year on bad lunches?!
  • While it’s becoming far easier to spend (One-click ordering, recurring charges, ApplePay, etc.), it’s also becoming easier to track our spending. That is great news, because the sheer volume of the micro-transactions that make up our spending can really start to add up.

So, before you commit to a budgeting app, or try to brainstorm your budget from scratch or using a worksheet, put on your detective cap, and try this:

  • Download 12 months of spending data from your checking account and credit card(s) into Excel.
  • Create three columns: 1) Month, 2) Category, 3) $ Amount.
  • Label your line items (rent, clothing, utility, groceries, eating out, Uber, etc.). There may be several thousand line items, but you can streamline the labeling process by sorting and auto-filling. If there is a high volume, that is the point of this approach.  The devil is in these details.  (Note: you can either label ATM withdrawals as ATM withdrawals, or try to estimate what you spend cash on.)
  • Last, create subtotals by category, so that you know what you’re spending annually on each category. If you want to get fancy, a Pivot Table in Excel will show you both monthly and annual category totals. [Pivot Table: Rows = Categories. Columns = Months. Totals across and at the bottom.]

Now, you’ll have a baseline of 12 months of spending, not based on estimates, but on cold hard facts. With this information, you can move forward and change behavior using accurate spending data from the last year. Nothing changes habits like the realization that you’re spending $5,000 per year on coffee.

So, give it a try, and let me know how it goes. If you don’t like the results, you can always use a worksheet or an app. (I’ll be reviewing some of the leading budgeting apps in an upcoming post.)

Two optional sources: Your pay stub may include some items that you’re spending money on, as will your W2, but if you want to focus exclusively on where your take-home paycheck is going, simply use checking, savings, and credit card data.

Good luck, and keep me posted @DDOadvisory.

Here’s how the three steps might look (using fake data):

Transactions are labeled:

TRANSACTIONS LABELED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotals:

SUBTOTALS

 

 

 

 

Pivot Table!  (Note that you can now see both monthly and annual numbers by category.)

PIVOT TABLE

 

Daniel D’Ordine, CFP® is the owner of DDO Advisory Services, LLC, a full service financial planning and investment advisory firm in New York City and Rhinebeck, NY.  He is a recovering musician.  Follow @DDOadvisory.

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