I’m dedicating the month of April to budgets and am excited to kick it off with this post on re-setting your budget using a budget detox. With all the craziness in the world and the constant news cycle showcasing the impact of the COVID-19 pandemic and economic recession, I’ve been doing my best to looking for silver linings. It hasn’t been easy find the silver linings these past few weeks but I did find one that I wanted to highlight in today’s post and that is the opportunity to do a budget detox.
A food detox is meant to reset your metabolism and promote a healthier and more aware approach to eating. A detox is often part of a larger plan to eat cleaner, lose weight or become more physically fit. A budget detox follows the same line of logic, reset the way you approach purchases converting money into things), create healthy spending habits and speed up the progress towards a financial goal.
April is the perfect month to kick off a detox given the recent announcement that Illinois will be under shelter-in-place through April 30th, 2020. With shelter-in-place comes the closure of non-essential businesses and social distancing but it creates an opportunity to detox your budget of non-essential and sometimes mindless spending. A silver lining.
The end results of the this detox is a truer sense of your monthly essential spending and allocating more of your monthly income to savings. This isn’t a “no spend” month, it’s a let’s see how little you can get away with spending in a month without the distractions of happy hours, shopping on Oak Street and meeting friends for dinner.
Who’s with me?
In order for this to work it’s important to track your spending throughout the month carefully. This can be accomplished a handful of ways. I personally rely on budgeting software to keep track of my monthly spending and categorize my expenses. I am a huge advocate of Mint.com but other great online tools include Personal Capital and YNAB.com (You Need A Bugdet).
Other manual solutions for tracking spending are downloading bank or credit card statements online or holding onto and collecting receipts throughout the month. Examples of what this would look like would be downloading your bank or credit card transactions into Excel, sorting transactions by category and tallying them up throughout the month. If you like the idea of physically (or virtually) collecting receipts, create an envelope system where each major spending category has its own envelope (or online folder) and file away the receipts accordingly.
For any of these tracking methods to be effective it should be an on-going exercise of tracking your spending and not a one-time deal. Logging into your online tracking solution, downloading transactions or tallying up receipts once a week might be overkill or it might be the perfect cadence to make you aware of your spending patterns. This is a personal preference but what is important is to find a frequency that is manageable for your family otherwise this won’t work. Personally, I check in on our expenses twice a month to coincide with our paydays.
Understanding the Results
Once April wraps up, its time to calculate the final results and get a true sense of your family’s areas of spending and at what level. When running through the numbers, I recommend sorting expenses at a high level into essential vs. non-essential categories. What is considered essential to one family may be non-essential to another. To help aide this sorting process, I created a list of common spending categories below.
If you were to tally up all the expenses that fall in the essential category and all the expenses that fall into the non-essential category, how do they compare to your family’s after tax income? Evaluating spending as a percentage of income is a great way to see spending patterns and begin creating the outline for a budget.
In an ideal world, a household budget should follow the 50/30/20 rule. As the graphic above points out, this would look like 50% of income going towards the essential, 30% towards the non-essential expenses and 20% towards savings or extra debt repayments. As well all known life is hardly ever ideal and that life the the ultimate budget buster that will throw spending out of balance. This month long pandemic imposed detox should give your family a true sense of the most essential expenses and how to responsibly incorporate non-essential spending and savings into a month.
The challenge moving forward it to use this month’s spending as a template for your monthly budget in the months to come. Going back to the reason behind a detox, it’s designed to clean the slate and promote healthy eating after. This budget detox is a chance to clean the slate and ignite healthy spending habits in the months and years to come.
So what did you learn about your family’s spending from this month? I’m including a few questions for you to come back to at the end of your budget detox.
- Did your family go without something?
- Do you feel like major sacrifices were made during the month?
- Did your savings ability increase? If so, by how much? And if not, why not?
- What surprised you most about the detox?
- What did you learn about your family’s spending habits?
- What spending changes did this detox inspire?
It’s my hope that at the end of the month you’ll be able to walk away with a true sense of your essential spending and how that compares to your monthly income. I am also hopeful that through this exercise you are able to get a glimpse at what a month of spending could look like with some restrictions in certain areas of spending. Of course the restrictions this time around are government imposed but perhaps moving forward your family will decided to put some limits around some areas of spending to replicate the results of this month’s spending detox.
Finally, I hope is that by completing this budget detox that you’ve found extra savings in your budget that can be applied to your emergency funds or other financial goals and that you like the sense of accomplishment that comes with exceeding savings targets and strive for this result in the months to come.
P.S. – Shoot me a note if you plan on doing a budget detox this month. I’d love to connect with you and others at the end of the month to share our collective learnings and insights in a Zoom meeting or other virtual format.