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.

Business Lessons From Rock Legends

Did you ever think that we could turn to rock and roll stars for lessons on how to conduct ourselves in a business setting? We sure can. Here are some lessons from three of my favorite artists.

1) Stevie Ray Vaughan

Fail magnificently. You never know where it might take you.

The first time Stevie Ray Vaughan played the Montreaux Jazz Festival in 1982, it did not go well.

You can hear the audience booing at the beginning of this clip, and quite often during the rest of the show. But he plowed through the set, head down; smoking; determined; focused. This set was typically impressive, but make no mistake about it. The band was booed during the performance and as they left the stage. You don’t need to be a music critic to know that Mr. Vaughan and Double Trouble were getting the heck out of town after the festival wrapped. Continue reading

Why You Need Long-Term Disability Insurance

Wouldn’t it be great if your income never stopped, even if you were seriously injured or too sick to work?  I’m not talking about some generous, benevolent gesture from your employer, or the kindness of strangers, your family, or your community. I’m talking about a guaranteed, reliable way to keep your income flowing. The good news is, such a product does exist, and it’s called long-term disability insurance (LTDI). Continue reading

A One Page Personal Finance Book

I’ve been kicking around the idea of writing an e-book on personal finance with a target audience of anyone who needs to work to pay bills and save for the future.  That’s just about everyone out there, no?  Here’s an ultra-condensed, one-page version of the book, which mainly covers “what” to do.  The other 149 pages (soon to come) will explain the “how”, “why”, “when”, and “where”.  Enjoy! Text is below. Here’s a PDF: Start Here Do This Get There.  Continue reading

Index Funds vs. Actively Managed Mutual Funds – How to Choose

One of the most common pieces of investment advice goes something like this:  “If you want to be a successful investor, put your money in low cost, passively managed index mutual funds.”  It’s offered freely – in magazines, via social media, TV interviews, books, and blogs  – by writers, professors, even strangers at cocktail parties.  This advice is bestowed upon us with the confidence deserved by only the truest of universal truths.  The idea here is that by investing your money in low-cost index mutual funds, you can’t go wrong, and you will reach your goals.  All things being equal, low costs = successful investing.  But it’s just not that simple. Continue reading

Take Control. Start Here. Do One Thing.

Do you want to take control of your finances, but just don’t know where to begin? Here’s something that you can do today, which will both boost your confidence and empower you to move forward on other personal finance projects.

The first step is to make a list of everything you own (your Assets) and everything you owe (your Debts or Liabilities).  Subtract the Liabilities from the Assets, and you have what we call your Net Worth.  The most basic form of this list, what I call the “Index Card” approach, can simply include the name of the asset’s owner, (account, property, artwork, etc.), where the account is held or located, and its current value.  It’s simply an inventory of everything, and helps ensure that nothing gets lost or overlooked.  Continue reading

What’s Wrong with Your 401(k)?

401(k) plans are always in the news.  And they should be.  This type of retirement plan – synonymous with all retirement plans – is one of the most widely used retirement savings vehicles in the U.S.  In the past several years, there has been significant focus on 401(k) plan fees, and whether plan sponsors (your employer) and vendors (investment, mutual fund, and insurance companies) are disclosing just what fees are being deducted directly from participant accounts. Continue reading

What Should Your Financial Plan Really Look Like?

How should your financial plan be structured?  The graphic below shows an approach that I like to follow when working with clients (whether they are just starting out with very few assets, or quite established with significant assets).  Please note that this is not representative of a comprehensive financial plan, nor is it meant to represent your unique situation.  It’s simply a tool to help clients prioritize where to begin and how to deploy their assets most effectively.  And where exactly do we begin?  At the bottom:

Continue reading

Does Your Financial Plan Look Like This?

It should. 

Why?  Because if you are saving for retirement, you need every advantage you can get; and every level of protection you can get.  As you work to earn money for your expenses, and invest your savings to reach your ultimate goal – retirement, for example – you, like the tank – could be hit with some bombs along the way.  You need a financial plan that provides protection from just about anything that life throws in front of you.  Continue reading

Welcome

You can get there from here.

Welcome. I know what you’re thinking:  “Just what the world needs…. another personal finance blog.  Next!”  You’re right.  The last thing the world needs right now is another blog devoted to personal finance. There is no shortage of personal financial information being shared these days.  But that’s exactly why I’m writing.  There is too much financial information.  My goal is to help you filter out some of the noise, and provide you with a basic understanding of timely and relevant personal finance topics and products: Continue reading