Kuta Beach

Kuta Beach

Saturday, 5 June 2010

Budget Your Savings, Not Your Spending

There are many personal finance tips out there, and one that seems to be popular is that you should keep track of where every penny goes. I have tried this (read Spending Rate Falling). For about a month I kept track of every cent I spent. I kept it using a spreadsheet in Google and produced nice looking graphs.

The result is that I figured out that I spend about $600 per month. That is very nice to know, but did I really need to track where all my cents went?

Keeping track of my spending was difficult. It's not practical to carry around a notebook everywhere you go, so in order to track my spending I used my mobile phone camera to take pictures of things I purchased. If there was no price tag I could take a picture of, I made a voice recording in my mobile phone. In the voice recording I detailed when I purchased the item, what the item is, how much it costs, etc. About once a week or more I went through my mobile phone and entered all this data into the Google spreadsheet. It was a lot of work!

I have now stopped tracking my spending. The reason why is because it is so tedious. It is good to be able to figure out how much you spend, but there is an easier way to do this. Quite simply, you follow this formula:

Savings or Investments = Income - Spending

In other words, how much you save or invest is equal to how much money you get in the form of income subtract how much you spend. If we rearrange this formula, we get the following:

Spending = Income - Savings or Investments

In other words, in order to figure out how much you spend, take your income and then subtract your investments or savings. This is much easier because your income (I'm talking about take-home pay here, which is how much actually goes into your bank account every fortnight) is usually fixed and it's easy to figure out what your income is. Investments or savings is also easy to figure out for me because I usually buy shares in increments of thousands of dollars. That is, I buy shares thousands of dollars at a time. Therefore, when I invest I do it not very regularly and it's easy and simple to keep track of.

I spend money on a lot of small things, for example, coffee, mints, and restaurant meals. When I buy non-investment goods, I tend to buy cheap things very frequently. However, when I buy investments, I tend to buy expensive things infrequently. It therefore made sense to ignore spending and focus instead on savings.

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