As 2019 drew to a close our family reflected on our inability to stick to our annual budget. Let’s face it, we commence each New Year with renewed motivation to do better and subsequently continue the same habits of previous years and expect a different result. Sound familiar???
When reflecting on the past we realised that hiding our budget away in a spreadsheet was not working for us. We also found that the arduous process of downloading the bank transactions each month and completing low-level categorisation neither fun or helping us to achieve our goals. Something had to change.
To increase accountability and ultimately step towards our family’s financial freedom we have decided to utilise a combination of the Scott Pape’s book, Barefoot Investor, Google's OKRs and Agile principles in our 2020 budget planning and execution.
The Planning
We have split our income into 4 buckets.
1. Expenses : The day to day living expenses including Groceries, Home, Health, Education, Transport and Utilities.
2. Smile : The money we set aside for family holidays
3. Splurge : The money we blow each month on coffee, entertainment, drinks and unnecessary shopping.
4. Savings : The money we save and bank each month that can further pay down our mortgage.
We wanted to achieve an income split of 60% expenses, 10% smile, 10% splurge and 20% savings. This classification aligned with our family goals of working to live. It also gives us a little bit of the things that make us feel good now via the ‘splurge’ category.
In order to get a sense for what might be achievable for us, we baselined our current spend across these categories. Keeping it simple we used a quarters worth of data from 2019. This is not 100% perfect but good enough for the purposes of planning for improvement this year.
This was the ‘get real’ moment. We discovered our Expenses were 68%, Smile 4%, Splurge 21% and Savings was actually going backwards at a rate of 10% per month. We are well and truly living beyond our means. Ouch. After discussion over the level of change we could make in 1 year we set the following 2020 targets.
We think this is achievable for us and provides us with just the right amount of pressure. Everyone has different circumstances.
Tip 1: Keep classification simple. We will utilise our banking institutions pre-determined expenses categories which means our transaction arrives pre-categorised and we only need to update the exceptions. We can do these anytime on our mobile banking app. This removes the double handling we were doing on low-level categorisation.
Tip 2: Set up separate fee-free transaction accounts for the splurge category. Each month transfer out the splurge amount so spending is capped. We also thought it was a nice way to show a gesture to the other if we gave up some of our own splurge money to treat each other or the kids. When you have a shared account "my shout" doesn't really have the same effect.
The Execution: Transparency and Fast Feedback cycles
The key behaviour change we are making is creating a physical dashboard on the wall.
At the start of each quarter, we will identify the quarterly result targets that will indicate we are on track to achieve the larger goal.
Like Google's Objectives and Key results (OKR) Framework the overall goals feels very challenging. They will encourage us to get outside of our comfort zones, prioritise our spend, and learn from both success and failure along the way.
The wall is in a prominent position in the house and will act as the information radiator that we need to stick to this.
We think a move from an annual budgeting to a quarterly budget cycle will enable us to course-correct if we need to and encourage us to keep going.
We have confidence indicators to help us have the discussion proactively throughout the month.
The monthly facilitator can update the dashboard at any time and call a stand-up at the wall if there are indicators that the category spend is at risk. This way the family can discuss how we might be able to get back on track inside the same month.
Sometimes it may not be possible as life happens.
Accountability and Reflection
We will introduce a monthly review process to reflect and adjust as we go. We will do this over dinner once a month to celebrate our progress and discuss any changes we might like to make in the coming months or quarters. Each month we will alternate responsibility for the below activities:
Book dinner
Collect data
Update dashboards and call stand-up as required
Lead the monthly showcase
We have also introduced a few fun activities where the kids can help as well.
We have downloaded the Urban Utilities Spotify Bathroom beats AM and PM song lists which only has songs less than 4 minutes in length to save on water use and energy costs. Everyone now chooses one of these songs for their shower each day.
We have elected a Lights and Fan Officer who is responsible for ensuring these are off each day when we leave the house.
We have elected a Recycling Officer to who will ensure the right items are making it to the recycling and we continue to make smarter choices with our packaging.
For the first time, I am excited about our budgeting year ahead. I am looking forward to my first lunch out to discuss our progress and when we take our first trip utilising our smile account. I will update this post after the first month and let you know how we are going. Hopefully, we are "Nailing it" and NOT "we need to talk".
Update after First Month
The results are in for the first month. Did we hit our target? No, we didn't. Did we learn an enormous amount? Yes, we did. What are we going to do with that information? Let's break it down.
What were the overall results?
1. We spent $120 more then we earned in January
2. We had 3 unplanned purchases which exceeded the budget.
3. We stopped the bleed on our savings. Remember we started with a baseline of -10% savings going in. We moved this to -.03 % in 1 month.
4. Water usage was up on this time last year.
What did we learn?
1. We learnt that we underestimated some of our expenses categories.
2. We learnt that it felt much better to discuss and agree the extra purchases as although it wasn't budgeted for it was discussed so we took ownership of the decision together.
3. While we haven't reached our target yet we are already trending in the right direction and that feels great.
4. I need to get a timer for the tap which tops up our pool. I forgot to turn it off and the water ran into our neighbours' yard. Yikes.
5. The dinner out at the end of the month to discuss our achievements and lessons learnt tasted great. The food and the process that is. :)
What immediate adjustments will we make to get back on track?
1. Adjust categories that were too low.
2. Re-set our savings goal for the year to accommodate for higher expenses that are unavoidable.
3. Continue, as we are so close to getting this right. To be honest it doesn't feel anywhere near as bad as I thought it would.
In Conclusion
Adaptive ways of working drive high performance in the workplace and can be adjusted to help you live the life you desire as well.
Setting goals underpinned by short and long term targets are essential for success. This applies in strategy and it's execution
Fast feedback cycles using metrics as a guide allow you to be honest about progress and gives you the essential feedback you need to pivot and still hit your targets. That must be a better way to manage your portfolio.
The process can be fun. We spend so much of our lives at work and if we take a collaborative planning process, display progress in a prominent position, celebrate success along the way we can smash our targets together.
Finally, if you need assistance to continuously deliver more with smaller budgets for your Product and Portfolio, Whiteboard People would love to hear from you. If you would like a coffee to chat on your personal budgeting process, we can do that too. I am not a financial planner but certainly happy to help you get going with a few essential changes to your habits. :)
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