Tracking your expenses is extremely important.
You don’t want to leave things to chance. If you keep track of how many calories you take in and make sure it’s less than the number of calories you expend, then you will never gain weight. Similarly, if you keep track of how much money you spend and make sure it’s less than the amount you bring in, you’ll never go into debt. This is precisely why I track my calorie intake and expenditure as well as my income and expenses. I track ALL of my income and expenses, no matter how minute. I categorize my expenses and account for every single dollar I spend in an Excel monthly budget worksheet to determine my minimum required income (MRI). When you have data to analyze, you are able to spot trends and identify opportunities for improvement. Without the data, you will only have a vague idea of your spending patterns at best and most likely will be completely unaware of them.
A monthly budget worksheet can be an essential tool to staying on track for financial independence.
Here is an example of my MRI spreadsheet:
I have substituted dollar amounts with percentages to hide the actual amount I earn. I budget for the various categories on a monthly basis, although I like to extrapolate biweekly figures to get to these amounts. I do this for a couple of reasons. First, I get paid biweekly (and I think most people do as well). Second, I schedule my mortgage payments on a biweekly basis. I’ll explain why I do this in another section. In some months, I’ll get three paychecks, so my income will be 50% higher than normal, but since many of my expenses are per month, I’ll have a surplus of extra cash that month. In some months, there will be an extra weekend (five instead of four). Since I spend most of my discretionary income on weekends (going out, etc.), I’ll be over budget during these months. I’ll allocate some of the surplus from my three-paycheck months to a reserve for the months with an extra weekend.
| Expense | Biweekly | Monthly |
| Mortgage | X | 2X = 36.5% |
| Condo Fees | X | 2X = 8.6% |
| Auto Insurance | X | 2X = 1.8% |
| Cable/Internet | X | 2X = 4.1% |
| Phone | X | 2X = 1.9% |
| Electricity/Water | X | 2X = 3.5% |
| Food | X | 2X = 5.0% |
| Going Out | X | 2X = 7.1% |
| Supplements | X | 2X = 1.0% |
| Gas | X | 2X = 1.3% |
| Maid Service | X | 2X = 1.0% |
| Gifts | X | 2X = 3.0% |
| Miscellaneous | X | 2X = 3.8% |
| Total MRI | X | 2X = 78.5% |
| Extra Principal | X | 2X = 6.3% |
| Investments | X | 2X = 7.6% |
| Rainy Day Savings | X | 2X = 7.6% |
| Total Excess | X | 2X = 21.4% |
| Earned Income | X | 2X = 100.0% |
| Passive Income | X | 2X = 0.0% |
| Total Income* | X | 2X = 100.0% |
*After pre-tax deductions, contributions, and taxes
Everyone’s monthly budget worksheet will look different.
I am a young, healthy adult without any dependents to support. If you are the head of a household, your expenses will look much different than mine. For example, a much larger percent of your after-tax income will probably go to food and miscellaneous items (unforeseen expenses). You will probably have different categories altogether (like “Kids” perhaps?) I am fortunate to be able to devote over 20% of my after-tax income to investments and savings for financial independence (I’m actually saving even more because my 401(k) contribution is not included here). While you might not be able to do this immediately, you should work your way up. Try to contribute at least 10% of your pre-tax earnings to some sort of retirement vehicle such as a 401(k) or IRA and at least 10% of your after-tax earnings to additional investments and rainy day savings. If you can do more, then do more.
Monitor your worksheet regularly.
You should keep thinking of ways to lower your MRI so that you can maximize the amount you save and accelerate your journey to financial freedom. I continually go through this exercise and adjust my expenses so that my Total MRI gets smaller and my Total Excess gets larger. When your income grows, your Total Excess percentage should grow. Keep your long-term goal of financial independence in mind when evaluating your monthly budget worksheet. For example, in mine, my mortgage and condo fees account for 45% of my Total Income! When these are eliminated, I’ll be able to live comfortably on 55% of what I currently earn! This is why I make paying extra principal and accelerating my mortgage payoff a priority. Currently, I generate no passive income, which is a problem. However, once your passive income exceeds your MRI, you have achieved financial independence and you can officially do whatever you want.
4 comments
Jordan - The Healthy Teacher
February 12, 2012 at 12:52 am (UTC 0) Link to this comment
Alykhan,
This is awesome that you are writing a book. It will be a rewarding adventure I’m sure. I will be checking you out often, I think this site is a great idea! My wife and I are just in the process of purchasing a house, and this budget idea is new to us!
Cheers,
Jordan
Jordan – The Healthy Teacher recently posted..Embrace Simple
Alykhan Gulamali
February 12, 2012 at 3:44 pm (UTC 0) Link to this comment
Jordan,
Thanks for stopping by! I think it will definitely be rewarding. Congrats on the new house! Being a homeowner is awesome and also a very rewarding adventure!
Richard
February 20, 2012 at 7:10 pm (UTC 0) Link to this comment
I definitely need to start tracking my expenses so I can lower my MRI. I am good about tracking so many other areas of my life…I don’t know what the mental hang-up is, maybe I need to make this a New Year goal. Great post and it just reinforces the fact I need to spend some time on an Excel worksheet for my personal finance.
Richard recently posted..Workout Wednesday: High Intensity Clubbell Trial by Fire Training
Alykhan Gulamali
February 22, 2012 at 2:59 am (UTC 0) Link to this comment
Richard,
Once you set up the worksheet, the rest is easy. It only takes a couple minutes a day to update. I like to update mine first thing in the morning and track everything I spent the previous day. Good luck!