I am not that sure on how to start this article about how to save money. I am not one of those people that saves 90% of our household income. We spend a lot, really, we actually spend a lot and have to properly take control of our spending habits in order to properly save money.
This is the part where I can state that we are lucky, we make more than we spend, but this is not a reason to overspend or to go nuts. Our car was 23,500 EUR new and now worth 11,500 in just 4 years with 45,000 km on board, we have an apartment that we let for free and a house for which we still have 28 more years of payments to cover the remaining 190,000 EUR left. Luckily the two mortgages are the only debts that we currently have. On top of all these, there is my investment portfolio split across P2P lending and stocks/ETFs.
As you can see, we do not throw away money, but I am still uncomfortable with our spending rate which I will list further down in this article. I would like to stat that I will not list the actual amounts spent, but I will take the month when we spend the most and use percentage references versus that month while comparing it to our self-imposed goal.
To budget or not to budget
This may be a personal choice for most of you, but if we budget, we are not going to have a nice relationship and I really love my wife. This is why we did not took the most common recommendation to do a monthly budget or the zero sum budget that a lot of financial advisers or bloggers recommend.
My decision was to copy part of what corporations do: the month end closure process. At the end of each month, we write down all transactions for cash or credit card payments and group them in a set of categories (accounts) that we have set up on Wave. Initially we started using this platform for receipts, but now we moved all the data that we need for the month end closure process on this platform.
When we started in December 2019 to track the expenses, we has a shock on how much we actually spend. After the first 3 month end sessions we started setting some goals and started working on an approach to reduce the expenses and save/invest/repay the mortgage with the remaining amount.
In case you are wondering why not use a budget and why I use this month end system. The answer is simple – this is a personal choice as a budget will not make the misses happy and as most of you know: Happy wife = Happy Life.
Average spend versus desired spend
Going back on point, the following is the monthly budget for the last 13 months as calculated in % compared to the first month for which we did the month end closure process. Keep in mind, my first month was calculated as 100% and when I am under that expense, all the remaining delta to the 100% is my calculated saving rate.
Most of them are where they need to be, but I really need to work on and weak the Mortgage via early payments, the Giving and Gifts as we need to invest most.
In case you are asking why some of the % have increased, it is because our aim is to lower the total cost. The current blue lines show the % from the average expense form last 13 months while the orange ones show the split for the ideal budget.
My current savings
The following table shows my progress for the last thirteen months. The baseline is the expense I tracked for the first time of doing my month end closure process, the average is just the average for the last thirteen months and the smaller percentage is the desired spent. Please note that my desired spend is realistic once I sell the apartment and we align our expenses a little bit. We live our life normally, we enjoy the pleasures of daily life and we do not have restrictions, but we are sensible and aware of what we are pending money on.
Based on this, I could state that on average we managed to save 14% across these thirteen months when comparing with the baseline. This is a good amount, but it is shy of our 36% goal versus the baseline. This is all calculated based on our desired monthly average expenses and hopefully we will reach our goal in max 2 years from now if we can keep the progress.
We almost hit the saving rate desires for some months, as you can see we had a good period between June and Nov with a better than average progress, but as we are closing in to the birth of our first child, the expenses are back up. At least they have not passed the Dec 19 baseline.
Based on my experience, I would state that the best way to save money is composed of two things: you are aware of your actual expenses and you start to invest.
By being aware of your expenses, you will know where the money goes. To me this is a better system compared to a budget. As our situation is one where the income is higher than the expenses, we prefer to check at the end of each month and implement corrections, rather than defining a budget and then stressing about sticking to it. Personally I think that I do not have the capacity to stick to a budget if I do not have to and I know that if we implement a budget, I will stop using the phrase we.
The second part is the motivation. After you have your first investments and you see the money grow or after you pay part of your mortgage early and see how the monthly cost decreases, you will start to want it more and more. The less you spend, the more you invest.