12.10.06
Managing money
Years ago I was mystified at how I consistently failed to have spare money. Then I discovered what I’ll call implicit spending: if you rely on some possession that has a lifetime, your daily use involves implicit spending. Say you own an item that has for you a useful life of 4 years and that you expect to pay $2000 to replace it when it goes. Then as you use it, you’re implicitly spending $500/year, or $41.67/month, by having it, since when it must be replaced you’re going to need $2000. The price at replacement time might vary from $2000, but you expect that you’ll have to come up with that for the replacement.
An apartment dweller might count as sources of implicit spending things like a car, tires, car battery, vacuum cleaner, mattress, TV, computer, and the like. A homeowner must also account (and accumulate) for a roof, water heater, furnace, dishwasher, refrigerator, washer, dryer, exterior paint, carpets, and so on.
In our possession-laden lives, the burden of implicit spending can be significant—and it’s in addition to explicit spending: insurance policies, automobile registration, birthday gifts, and the like: periodic expenditures that we more obviously and explicitly must make.
I created an Excel workbook (download at link) to track all this, starting with the money you get from your take-home pay. Each page examines one category of saving/spending (mostly spending, I must admit) and allows you to enter the amounts appropriate to you. Each page is protected so that you don’t accidentally overwrite formulas, but if you want to tinker with it, the password is “123″ (without the quotation marks).
I think if you work through this you’ll be surprised at the amount of money you’ve obligated yourself to pay, on average, each month. And if you don’t have that money, bad things will happen to you, sure as my name is Leisureguy. Take a look, and see how it works for you.
UPDATE: The obvious corollary: the fewer material items you accumulate, the less money you must put aside in your replacement savings. By adopting a lifestyle that’s light on material goods, you free up more of your income for saving and investing. That’s part of the message of the interesting and useful book Your Money or Your Life, by Joe Dominguez and Vicki Robin. I highly recommend the book and the application of its ideas. Quite often, it seems, a material object is acquired and valued not for what it is, but in an attempt to satisfy some psychological need. It’s much wiser to identify these needs and deal with them directly than to try to satisfy them by accumulating stuff (and increasing the implicit spending you do). And an Update to this: watch this little movie for a new appreciation of the burden of stuff. — Dominguez, Robin, and others also started the New Roadmap Foundation to provide further support for their ideas. The Web site for that is FinancialIntegrity.org.
UPDATE 2: When you do acquire things, many of those things must ultimately be disposed of: given away, sold on eBay, thrown away, or whatever. Some may be simply used up: a washing machine, for example. But still it must then be discarded.
It helps when you go to buy something—a book, a vase, a chair, a set of dishes, whatever—if you take a moment to decide how it will be disposed of. You can’t assume, BTW, that giving it away will automatically work: it might well be that the intended recipient will not want it when the time comes. One way to give things away is through the Freecycle program.
It will then perhaps occur to you that you can finesse the problem altogether by not getting the thing in the first place.
UPDATE 3: A suggestion on the money you’re setting aside for future use: save this money via automatic transfer to ING Direct. (Last I checked, passbook savings accounts in regular banks paid 1/10th of 1% interest per year.) As the money accumulates, put it into one of Vanguard’s low-fee balanced funds. (For most of their funds, “low-fee” becomes “no-fee” once you have $10,000 in the fund.)
UPDATE 4: The Simple Dollar has a good post that sums up the fundamentals of personal finance. Take a look.
UPDATE 5: I just added a bit to the workbook. This latest version has my email address on the “Summary” page as “leisureguy.wordpress@gmail.com“. If you have some other email address there, you might want to download the latest version. The main difference is small. I include this text in the “Savings” page:
A comment on the 401(k) and other tax-deferred plans: the account balance is misleading. You don’t really have that much money available to spend in retirement because you must pay taxes on the money that you draw out—and it’s taxed as ordinary income. So the total available for you to spend is (depending on your tax bracket) is 25%-30% less than the total shown. That’s one reason after-tax savings are so important: that balance is actually available to you.
BUT: Be sure to max all all your tax-deferred options (401(k), IRA, and the like) BEFORE you start your after-tax savings. Also: check out the ROTH IRA: that money perhaps can be withdrawn tax-free.
UPDATE 6: Be sure to check out the resources available at FinancialIntegrity.org.
Joaquin said,
8 February 2007 at 5:38 pm
This spread sheet is awesome! I am awed. Unreal how powerful a tool this is. Thank you so much. Now how can I put this in my Hipster PDA?
appletree » Blog Archive » Tuesday Links: ‘Sadrist Angel’ Edition said,
12 June 2007 at 4:00 pm
[...] help you make a more realistic budget, Leisure Guy has put together some handy-dandy spreadsheets for [...]
Alfonso Nin said,
29 October 2007 at 11:46 am
I have listened to many lectures, bought books on financial planning and budgeting, and had consultation one-on-one. I am 33, and have zero saving and need a budget. Your tool is the first thing I feel I could use to
make my goal of saving that I need to do by next year September.
This tool gave a clear amount of how much I need to save! thanks.
LeisureGuy said,
29 October 2007 at 11:51 am
Thank you very much for your kind comment. Makes my day!
JAO said,
2 November 2007 at 8:39 am
This programme is truly great, I have been trying to manage my finances better for at least a year now and it wasn’t working very well as I couldn’t keep within the budgeted lines. Your way allows me freedom after taking care of all the big ones
Thanks a bunch
sredlums said,
8 December 2007 at 4:04 pm
Hi.
Just curious, what program did you use to make this spreadsheet?
I’m on a Mac, and I use Numbers (part of the Apple’s iWork-suite) for my spreadsheets, and normally it handles even complicated Excel-files just fine.
It chokes on yours however, saying that the program used for making it is not supported…
Did you use a special program, or else what version of Excel did you use?
Just trying to troubleshoot, because I am curious to look at the spreadsheet. I am in the middle of making one myself, so any inspiration is welcome!
LeisureGuy said,
8 December 2007 at 4:12 pm
I just used regular old Excel, but it is a multipage workbook, with formulas reaching across pages in some cases. It’s done in Excel 97, originally, and I keep it still in that format.
If you know someone who has one of the Windows PCs, you might want to take a look at it on that computer for the ideas. Here are the worksheets that it contains:
FAQs – Frequently asked questions, and their answers. Review this before you start.
Your income – Just your take-home pay, which is what you control and spend.
Cash reserve – A reserve equal to 3-6 months of take-home pay.
Savings – A portion of your income set aside to fund your retirement.
Fixed expenses – Expenses that you must pay over the course of a year.
Replacements – You also must pay to replace things that eventually wear out.
Weekly allowance – Partly discretionary, partly not; paid by cash from your pocket.
Periodic purchases – Discretionary purchases paid by check periodically.
Future purchases – Big-ticket discretionary purchases that you must save for.
Summary – A summary of your income and where it goes—and where you are.
QuickForm – You can switch to this format once you’re familiar with the method.
Tips – Ideas to help pare your expenses.
Your worksheet – An unprotected worksheet for your own use; you can add others.
Daniel Long said,
8 December 2007 at 4:27 pm
Four words: THANK YOU *VERY* MUCH!
Mr. Chapel said,
9 December 2007 at 1:47 am
I found your workbook through LifeHacker and it looks like something I could use to keep my implicit spending at manageable levels. I’ve been able to budget pretty well lately but hadn’t even thought about that part of expenses yet, until two months ago.
I do have a question; since I live in Europe, is it possible to change to the currency symbols to Euro?
Jason Peck said,
9 December 2007 at 6:26 am
Great, great resource!
LeisureGuy said,
9 December 2007 at 7:48 am
Jason, thanks.
Mr. Chapel: Go to a page of the workbook, unprotect the sheet (password is 123), highlight the cells with $, and format them for €. (Excel offers that format.) Then I suggest that you protect the sheet again so that you don’t accidentally overwrite the formulae.
RobertWms said,
9 December 2007 at 2:03 pm
Sheet opened and all formulas worked fine in Open Office.
Thank You so much!! I’ve been looking for this for a while now.
Dana Carr said,
10 December 2007 at 9:10 am
You have no worksheet for 401K contributions already being made or possible IRAs I might have. For example, I have 50K in a IRA rollover account and take $300 out of my monthly paycheck that goes into a 401K account. Shouldn’t these be counted as savings? If I had an emergency I could take money out of the IRA rollover.
LeisureGuy said,
10 December 2007 at 9:17 am
Certainly you can count those as savings if you want. And I provided the password so that you can alter the workbook to suit your circumstances and inclinations. It’s really not intended to be a universal solution. I was aiming at the 80% or so.
I will say, though, that the point of the workbook is to help people live within their take-home pay—that is, after deductions for the various things like 401(k) plans. And taking money out of one’s retirement savings seems a bad idea, on the whole. Better if one can avoid it by managing the take-home pay so that it covers all expenses.
Dana Carr said,
10 December 2007 at 9:26 am
Thanks for the info. I know taking money out of retirement savings is a bad idea but in an emergency it might be necessary.
manzoor said,
11 December 2007 at 12:02 am
This is really awsome. I just downloaded it and its so easy to understand compared to other applications. Man telling you this is really great choice….Good work !
sredlums said,
11 December 2007 at 4:44 pm
@LeisureGuy:
thanx, I guess Excel ‘97 is not supported (too old?).
It’s not a problem, I work at a small firm where I am ‘the computer guy’, so I have all the PC’s I need to check it out at my disposal (more than I want really, as a matter of fact, being a Mac user at home, but that’s another matter…). I’ll make some time for it soon to check it out. If i’s really good I’ll try to make a Numbers-version of it too (if you don’t mind).
Ofcourse I wouldn’t mind if someone beat me to it…
LeisureGuy said,
11 December 2007 at 5:47 pm
No problem if you make a Numbers version, though I would appreciate a credit.
Schmy said,
8 June 2008 at 6:55 am
LeisureGuy,
My sincere thanks.
This was a real eye opener; I can now clearly see why my credit cards debts were not dropping as quickly as I’d planned.
With your permission, I’d like to make a few minor adjustments and pass it on to my friends; I’m Australian and our superannuation (retirement savings) works a little differently over here.
Again, thank you so much.
schmy.
LeisureGuy said,
8 June 2008 at 9:01 am
No problem, but I would appreciate it if you’d still give credit and the original source, and describe the alterations you made. This is in case your version ends up being passed along to someone in the US, who could then easily get the original.
I’m pleased it was helpful.
Dan said,
26 February 2009 at 11:08 am
LeisureGuy,
Wow; what an awesome budgeting tool!
I am heavily in debt, and there is not shortage of companies that want to take more of what little take home pay I have. Your sheets assist me in showing my wife “the money” and why making/sticking to a budget and getting out of debt are so important.
I really like the spreadsheet, and your spreadsheet coupled with a snowball worksheet (also freeware) from Vertex42.com are what I am using to crawl (and I mean crawl) my way out of debt. I use your worksheet to capture all income and variables, then the Vertex42 worksheet to more effectively pay down debt. Between the two of you, I plan on being Credit Card debt free in six years.
I know this seems a bit petty; but I’d like to change the section that reads:
“namenamename”
“emailemailemail”
“da/te/date” to match my family; I tried the password listed above to no avail. Thank you once again for an awesome worksheet.
Dan said,
26 February 2009 at 11:37 am
LeisureGuy,
Nevermind about that password stuff; I guess I had an older version and downloaded the newest from your website. Great stuff – Thanks!!!
LeisureGuy said,
26 February 2009 at 12:13 pm
Very pleased that it’s working for you. The best source for the current version (still free) is here on Lulu.
Denise said,
25 July 2009 at 7:42 pm
this is a WONDERFUL tool. Wonderful, and sobering. I have never looked at my money this way before – if I had a positive balance in the bank, I assumed I was OK … and at the same time, I’m making the most $ I’ve ever made and can’t figure out where all my $$ goes! This tool is a lifesaver. Thank you SO MUCH for making it available. Now I have a LOT of work to do!
LeisureGuy said,
26 July 2009 at 6:09 am
Thank you kindly, Denise, and feel free to spread the word. The results are especially staggering for those who own their home rather than rent: LOTS of implicit expense in owning a house.