The difference between theory and practice – Your budget vs your actual spending

If you’re interested in FIRE then you likely have a budget or at least know that it’s a good idea to have one.  Maybe you use a spreadsheet, maybe you have an app or use the Moneysmart budget calculator, whatever works for you is fine.  Sure it’s not a necessity, but it likely makes life easier.  The trouble is that once we’ve made that budget, we’re not checking up on whether we’re sticking to it or not.

What we often find is that when we did up the budget we had a whole bunch of great ideas on cutting costs, we promised ourselves we’d limit how much we spent on clothes or eating out etc, we only looked at the expenses that immediately came to mind, and then we came up with the most optimistic scenarios we could think of. 

Which is better than nothing I suppose, but it’s not how it will actually work in the real world.  As the great Yogi Berra once said, “In theory there is no difference between theory and practice.  In practice, there is.”  So what do I do instead?

To make my budgeting more accurate I base our budget on what we actually spend instead of what I think we spend.  To track your spending as much as possible you need to be using debit or credit cards rather than cash, obviously don’t use credit cards if you’re not paying it off in full at the end of each month though. 

To see what we actually spend I simply download into a spreadsheet all the transactions from my bank for the last year and sort them into the same categories as my existing budget.  Ideally you already have a category in your budget for all the spending that you did, if not then it’s probably a good idea to create one.  After you’ve done all that, it’s time to compare your budget to your actual spending!

Looking at my family’s spending for 2018, our overall actual spending was pretty much exactly the same as our budget!  So well done us! 

It was an unusual year in that we finished building a house and had to buy a bunch of furniture etc.  Because this is all one off stuff it isn’t in our annual budget (although it was in our house budget, because of course I had a house budget!) and I’m excluding it from the discussions below as we hopefully will not need to buy any more stuff for a very long time.  If I never build another house or see the inside of a furniture store again I will be a happy man! 

Unfortuantely our overall actual spending and budgeted spending being much the same hides the fact that we had a lot more spending in some areas and a lot less spending in others than anticipated. 

So the good news (kind of anyway) is that we spent a lot less than was in the budget on entertainment such as concerts, shows, sporting events etc.  Which is nice from a budgeting point of view, but given that is stuff that we actually enjoy I’d prefer that we actually spent what we budgeted on this.  We had a baby this year which drastically reduced the amount of free time that we had hence less concerts and sporting events etc, hopefully next year is better on this front.

The other area that we didn’t spend as much as budgeted on was house maintenance.  Because it’s a brand new house there was really very little maintenance that we had to do.  If anything when I was categorising spending for this year I probably put a decent amount of stuff from Bunnings etc into the maintenance category when really it was a one off purchase or something that I won’t need to buy again for a number of years. 

I’m pretty hopeful that my power drill will last a very long time.  Similarly my shovels, rakes and implements of destruction should not need replacing anytime soon.  However inevitably as our house gets older it will need maintenance from time to time and therefore I want to have a reasonable amount budgeted for this so that it doesn’t come as a shock to the system.  This will also hopefully cover replacing furniture etc over time.

The middling news is that we were on track or within a hundred dollars or so on most categories.  This is to be expected given that our budget is based on what we have spent previously, so it’s not as though we were just plucking figures out of the air when we came up with our budget.  Lots of these are also fixed amounts, such as internet, phones, health and life insurance etc.  So I can just plug a figure into my spreadsheet and that’s what it will actually be, so of course it matches up.

The bad news however is that we spent a fair bit more than we thought we would on two other categories, these being Food and Groceries, plus utility bills.  Both of these were about 20% higher than they had been previously. 

At least some of the extra food and groceries bill is no doubt due to the fact that we had another child in early 2019 there are 4 of us now rather than 3. 

Although a baby doesn’t necessarily eat or drink a huge amount (she has mummy milk so no extra cost for formula) she does go through an awful lot of nappies.  And even though we use the Aldi ones (which are excellent in our experience) they still cost a fair amount, to the extent that this could easily be a third or more of the extra 20% that we spent in this category.  Also, as our first child gets older he gets hungrier which also adds to the food bill.

Our utility bill being higher is a bit of a surprise.  My wife shops around on this and is extremely conscientious about turning off any electrical device that isn’t being used.  She has also trained our eldest child so that he also tells me off for not turning off lights if I walk out of a room!  So far this summer we’ve only used our air conditioner once and our house was built to be pretty energy efficient so we didn’t have to use the heater much in winter.  So I’m not sure why this bill is a fair bit higher than anticipated, but the reality is that it is.

So what do I do with all this information now that I’ve looked at it?  Well the first step is to talk about it with my wife and see if there is anything that we can do to get our costs down. 

We’re already pretty frugal with our food and grocery bills so I’m not sure that there is much room for improvement here.  Dave at Strong Money Australia has done this excellent post on how to save money on your food and grocery shopping here most of which we already do and you can see my comments in his article on the other stuff that we do as well.  So saving money in this area is likely out, if anything the bill will probably go up as our two kids start eating more.

Likewise our higher than expected utility bill may just be the new normal.  Prices continue to go up so it shouldn’t come as much of a surprise that our bills are higher.  We’re already on the cheapest rate and my wife checks the comparison website every 6 months or so to ensure that we are getting the best deal available.

So with that in mind, what do we do?  Well it’s simple, we change our budget so that it reflects these higher costs.  There’s not much point kidding ourselves that these are one offs, it’s pretty likely that what we spent is what we’re likely to continue to spend in which case our budget needs to change. 

This obviously has some effect on what we will be able to save and invest which isn’t ideal, but I’m a big fan of being realistic about these things.  If we were desperate to save a higher amount we could cut some of the discretionary spending on areas like entertainment and eating out but those are things which we get a lot of enjoyment out of (when we actually do them anyway!) and I’d rather have a slightly lower savings rate than a less enjoyment rate. 

So next year we’re probably going to be spending slightly more and saving slightly less than I would have anticipated. It is what it is. We’re still saving a very large percentage of our income each year and whilst this change isn’t ideal it’s better to accept reality than to lie to yourself.

Do you have a budget and do you track your actual spending?  If you enjoyed this post and would like to read more like it then please subscribe!