My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Friday, July 8, 2011

Budgets and underestimated household expenses

On Tuesday, Roma Luciw quoted me on "Nine expenses you underestimate" in her article in the Globe & Mail. Today, I am posting the entire blog, including those nine expenses, as I think my discussion on creating a one-month budget is important. For anyone who is a "Where's Waldo" fan, see if you can spot the obvious edit the Globe and Mail made to the original nine household expense item descriptions.

I often get calls from clients and potential clients requesting a consultation to discuss their family spending and family budget. Once we set a time for the meeting, I request that prior to the meeting, they prepare a best estimate summary of their spending. Unfortunately, I know this request will most likely not be fulfilled because; (1) most people have no tracking system for their expenses, (2) many summaries are missing so much information that they are virtually useless, or (3) the appointment will never happen.

I find it truly amazing that so many people are so averse to budgeting and tracking their spending and they remain so even after a triggering event that causes the initial phone call to set up the appointment. Not only are people averse to budgeting and tracking, they are also a little lost when it comes to their current habits. When I have the chance to meet with both spouses, I like to ask them to estimate how much they think they spend a month. Typically, one spouse has an idea of how much they are spending while the other spouse is not even in the neighbourhood.

What really drives me around the bend is that with minimal effort, it is possible to make much better decisions. Even if you track your expenses for only one month, you will have a baseline for most of your spending because 75% or more of your expenses are likely recurring monthly expenses of the same or similar amounts. If you only track significant expenditures after that one month, you will have a fairly accurate budget for the full year.

Tracking expenses is not only necessary to ensure you have enough money to pay your bills, but it is also the starting point for savings (see my blog Where did my money go? for tips on tracking expenses). Once you know what you spend, you can budget to ensure you do not spend any additional funds and you can even cut some expenses.

In general I have found people severely underestimate the following expenses:

Weekly living expenses- While each spouse may only go to the ATM one time and thus have an idea how much they spend individually, often both spouses are going to the ATM and those weekly cash expenses are significantly higher than you think.

Gifts- Most people have an idea of how much they spend for Christmas gifts as the holiday season is a condensed period of time, however, how many birthday gifts, anniversary gifts, graduation gifts, etc. do you give throughout the year? This is especially relevant for those with large families.

Charitable donations-Many people do not track their donations throughout the year. This can be problematic, especially for people who wish to give a certain percentage of their income in a particular year.

Automobile expenses- Many people fail to consider some of their car expenses. This expense quickly escalates when you include your lease, or loan principal and interest, repairs and maintenance, parking, insurance, tolls, etc.

Sin costs- The cost of beer, wine, cigarettes, funny cigarettes, is never correctly accounted for and often severely underestimated.

Kid’s programs- Today’s child is enrolled in multiple programs. In my opinion many are “over programmed,” however, notwithstanding my opinion, these programs are very expensive and add up quickly.

Cottage- Cottage costs are problematic on two accounts. Not only do you need to track the property taxes, mortgage, interest payments, repairs, maintenance, insurance and utilities, but you also often have a massive entertainment expense that even the most detailed person would be hard pressed to track.

Restaurant- For some people, these costs are not substantial, but for many double income families, these costs are substantial.

Women’s beauty costs- Often way understated, but guys, I would not even go there.

As discussed above, tracking costs is important for both budgeting and increasing your monthly savings. I strongly suggest that if you are not willing to buy an accounting program such as Quicken, you try my one month experiment and then just track your large one time expenses. It will be an eye opening experience.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

1 comment:

  1. Most people don't include alcoholic beverages and cigarettes in their budget. I think it's a good idea to include them so you may know what to limit.

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