There are quite a few bloggers who talk budgets, give running commentaries monthly on spend down to the penny, glory in their side hustles and how then can use that to reduce spend. Many really are just lists of what someone has actually spent and ignore the real purpose of all this itemisation. The point is not to work everything out to the last penny and stick religiously to it. The point is to get better at more accurately predicting future cash-flow needs.
Predicting future monthly cash-flow allows us to better plan how and when we take money from our investments so as to maximise their returns by not having to ‘just react’ unplanned. Being a few % off is fine. Being 20% off is not fine unless you can cope with that variance.
Having used what I learned, I now have my spend profile for the year
More on that later ….
So what happened in 2019 ?
So when I did a budget last year, I knew it would not be as accurate as it could be, but seemed a decent stab at it and start. As I have found, there are many things I just never really considered. Now I know and have a much more accurate forecast for this year.
So the detail below is so you can see my process, my reasoning. In no way is it for everyone – it is what makes sense to you.
I started the year with a budget plan, albeit quite loose and really covering main items. I knew that it would not be overly accurate, but short of downloading and going over previous year bank statement I was never going to be spot on.
So now the data is in and was updated with a simple statement download each month followed by categorisation.
So how did I do ?
The total spend was 161% of what the original budget plan was. Considering over many years I managed very large work budgets with considerable accuracy, it is awful.
Or is it ?
Throughout the year we get exceptional items we don’t plan for. One of the reasons many favour a large cash reserve is not just for market variance in returns, for this very reason.
If I remove the exceptional un-budgeted items then we spent 113% of the budget plan. Way better considering at the start of the year I knew I did not have some things fully included or accounted for. In my working life I we had contingency budgets so the accuracy was always the sum of the two. Things happen, things don’t… that is what contingency is for.
So baring my sole for the purpose of learning here, if I look at my categories, I have some underspend to budget, and some overspends. But I can also look in terms of exceptional un-budgeted (and largely unforeseen) items.
So… in total £24.5K overspend to budget … ouch
But if I take off the exceptional items that comes down to £5.3K (13% extra from my original budget of £40.3K).
Now I know what you may think … fudge, fudge, fudge, and that is true in an absolute sense. But we did rather suspect we would exceed the budget and £5 or £6k was where we had in mind, so actually not a massive surprise., and this year my wife had her retirement lump sum so we knew we had the cash.
Now Cash-Bucket devotees may seize on this as a demonstration of the need of a large cash reserve, but as I discussed in my previous article we had time to plan. The really big ones were the en-suit complete change and we knew we were going to do this, but thought next year. As it turned out we had the money and the current en-suite shower whilst working was not that great and getting worse (its age and comes to all things), so we moved it up. As we also moved up some exterior maintenance from next spring, partly to help a builder friend out with his workload and cash flow and partly because winter is now about here and we did start to wonder whether next spring was too late. As it turns out he did rather say it would have been harder and more costly, so was done at the right time.
So what of this year ?
What can I glean from the breakdown ?
How can I adjust my forecast cash flow to be more accurate ?
A few obvious things I just thought were minor or ignored
- Our cars – we use a lot less fuel that we did when we worked. I just did not consider this. It may change a bit this year as I plan some long trips to Scotland 3 or 4 times, but the way I estimate is certainly conservative. Having just changed all my tyres (hence the overspend) and a service done there is nothing really to spend on our cars until 2021
- Shopping – we do have a bit more chaos in our lives now. When we both worked we did a weekly shop, were fairly clear what we needed and essentially spent much the same month to month on average. What has changed is that we are a lot more random and just as a result don’t think too much about what goes in the basket. We do need to change this habit as we end up throwing far too much away because we end up doing stuff or going somewhere rather more off the cuff. Great in itself but neither of us like being wasteful and do a lot of recycling. Just food wise we really are being wasteful .. and that has to change.
- Health and Fitness. If I exclude the private medical things last year, we still spend circa £1.5K. Now I joined a gym in January that accounts for about 60%, but my wife has some regular girly things (massages, feet whatever with a file, yoga and the like). So budgeting a specific item is now appropriate.
- Cash – wow … almost £4K. Considering I hardly use cash any more I did wonder a bit here, but my wife likes to do some shopping in the market with her mum and its all cash. I have a feeling we get a bunch of things for Ma but what the heck. Then there is the various lunch clubs and we both do. Now retired we regulatory meet up with friends and old colleagues for lunch and a catch up. She sees old colleagues she worked with regularly for group get togethers and I have an old foggies group that meet every 6/7 weeks. It is always easier to chuck cash in these and to our surprise ended up being a fair bit.. not far off £800 when I totted it up. Other biggy is our cleaner. We have a lady who comes not the whole year but a good chunk of it and we pay her cash (she is a legit business so not tax dodging). I guess I never thought how much that would be or to itemise it. So with £800 for lunch clubs, about £1.5k for the cleaner and around £1.2K spend in the local market, that’s £3.5K with about £500 odds & sods…. wow ….I need to budget a fair chunk of cash.
- Misc items – I did have a catch-all, but went well above it. As we are fortunate enough not to have to worry too much, it has been oh too easy to just buy something, subscribe to a magazine, or do whatever. I just lump in ‘Misc’, so again, I need to budget a bit more.
So the big changes to my forward planner for this year are
- Car (£1.0K) – just need less as we have no known big items like tyres, and we are driving less
- Shopping £0.9K – make the provision, even though we just need to plan weekly shops a bit better
- Misc (inc cash) £5.3K – Now need to take into account all the stuff we do and the cash we use
- Health & Fitness £2.2K – Her ladyship will continue her beautification and I intend to use the gym a lot more
- Aviation £1.5K – A bit of a hobby costing a few quid, and I never accounted for it before properly
So all in all, about £9K making the yearly budget being just over £38K. The item missing is something I consider very discretionary, and that is Holidays and travel. With what we would like to do and where we would like to go, I am provisioning £9K, although with some frail ‘oldies’ we are not at all sure we can go far or when… but the important thing is to provision and account for the possible cash-flow need.
So expected outgoings this year should be circa £47K, or more accurately perhaps, in the range of £38K-£47K.
What exceptional items could I expect ? .. none … I did not expect the last year. Thing is, as I looked at before, so long as I have a couple of months notice to pay, there is no real problem. That is easily obtained by paying with a credit card. I get 6 weeks to pay before I incur interest so a clear easy buffer.
Another part of the cumulation has been adjusting and adding categories. I also separate out now three different classes:
- Primary – the stuff that must be spent and has very little adjustment. Some Shopping could be adjusted, spend of car (fuel) as well by simply not going so many places, but in reality, 95%+ is pretty fixed
- Discretionary – most of the other stuff we spend on ‘life’: Going out, holiday, most of the cash, misc items and Health & fitness. A large part of this could be very quickly chopped back if needs must
- Other – the rest. Most of it is pretty discretionary.
Last year my Primary spend was 40.4%, Discretionary 32.6% and Other items 27% of the total spend
This years plan has just over 50% Primary, 41% Discretionary and 8% Other. This wide variance is largely as there are no exceptional items that would increase the ‘Other’ Category.
Incidentally, this comes in as around the same estimation I see in many articles: Around half for necessary, 35-40% for discretionary and the rest some exceptional or other items.
Lets suppose things take a turn and I need to cut spending
What could I change. Well that is fairly straightforward to compute. We have worked out the % we could drop on a line item so it is the that % of spend remaining (assuming we have largely stuck to the spend profile).
In my working, if for example I hit the breaks in June, then potentially I could save £12.2K to the end of the year. If September £6.5K.
In the end, a plan just gives a profile of expected spend and if we hit the breaks, it just changes the profile left
Putting my 2020 budget pan and estimation of what I could cut together I get the following:
So basically, including a holiday budget, the plan is £47.6K.
Taking out the bits I could chop (albeit the amount will reduce through the year), then I need £30K. The difference this makes in what I need to draw out of my pension fund after taking the guaranteed fixed income my wife has is an average of £1.5K per month (around £18k in a year). (That is net, so would be bigger gross before tax).
We could pay our mortgage off but as the interest rat is so low (just over 1.4% if memory serves), it makes no financial sense to liquidate investments returning rather more. But …. we could if we needed to reduce our cash-flow by around £10K pa making a very basic need of £20K pa …. a lot less than £47K. Having flexibility is just such a confidence boost.
As I have a monthly tabulation I can from any month know what I could save if I needed to. Pretty straightforward, but just looking at it all, without even blinking I could drop at least £1k a month just like that… that is a great flexibility to have.
And hence I now have a lovely colourful tabulation of what my provisional monthly spend profile looks like varying from around £2.6K to around £5.5K. A wide variance, but all dependent on the big discretionary items:
This is the real power of a budget – it gives you a plan and tells you what options you have.
One final point. I am undecided as to whether to take funds from my pension on a monthly basis or quarterly basis. There is little cost implication, but it does reduce paperwork and provides for having that small buffer I discussed in a previous article on ‘Cash Buckets’. The only thing to bear in mind is that the quarterly cash requirement is likely to vary depending on when we are planning holidays. My plan shows £9.7K, £13.3K, £13K & £11.8K if I include holidays, but pretty static at around £9.6k if not. Holidays are highly discretionary and can wildly affect monthly cash flow.
Just as in my working and business life… cash flow is king ! Companies get into real trouble (or fold) more because they can’t control cash-flow than any other reason. Why should we in our personal lives be different.
To know is to be forewarned, to be forewarned is to plan, to plan keeps you out of trouble
So now, for 2020 I have a much more accurate budget. I am taking into account the significant items I really brushed over before and (exceptional items aside), expect to be pretty well on-budget….. let’s see next January !!!
What lessons could someone take from this ?
- Don’t be too hard on yourself – it is a process of estimation and categorisation. Having a plan and expected monthly cash-flow is the most important part. If it turns out to be consistently out then adjust it or reign in spending
- Don’t get all picky about it. Every single penny is not important
- Don’t worry about individual items (numbers or categorisations). It is the big picture that matters
- Make sure you factor in the big blips to normal cash-flow, ie holidays
- Don’t panic if something happens you did not think about – use the knowledge in next years budget