How I lost $8,000 in one year

I have a budget.  I’ve had a budget since I was in university.  For many years, I thought simply having one was enough.  That was until I lost $8,000 in one year.

My budget was very similar to how my parents prepared their budget.  I got my paycheck and used it to cover all my expense and then I would save the rest.  That means I spent less than I made.  That seems pretty straightforward and I thought that worked for me for many years.

Still, there were times when I’d get to the end of my pay period and think, where did it all go?  Some months it was $20 or $50,  sometimes $100 on a spendy month.  Not huge amounts and while I felt a twinge of guilt, it didn’t really bother me.  I just knew that I didn’t save quite as much as I had hoped.

I was shocked by the number in my “take home” pay column when I looked at my end-of-the-year pay stub a couple of years ago. Not because the cumulative amount was so large, it was because I had nothing to show for it.  I quickly tallied up my housing costs, a rough figure of my bills like cell phone, internet, and hydro.  Added in a short vacation I took to see friends Stateside.  Even after factoring these, I was still thousands of dollars short.  Somehow, I had lost track of at least $8,000 in just 12 months.

How could this happen?

Then I thought of all those lunches with friends, a couple of drinks after work, the spontaneous trip to Sephora for a serum or hot new lipstick.  Oh, that leather jacket that I loved.   Could this be where my $8,000 went?

Probably, but I’ll never really know because I did a terrible job of actually keeping track of small expenses.  When they say “Don’t sweat the small stuff”, apparently this is not what they meant. Despite the initial shock,  I still don’t have a 100-line excel spreadsheet for my budget. Now I just have a zero-based budget.

When I get my paycheck now, I first transfer money to my savings account(s), pay my expenses and then spend the rest.  This is called a Zero-Based budget because you don’t stop allocating your dollars until you reach zero.

For example:

Let’s say I took home $3,000 after taxes every month and these were my hypothetical expenses (depending on where you live, this might be hopelessly idealistic or hopelessly unrealistic, but in the end, it’s just for illustration):

Housing is $800
Food is $350
Transportation is $140
Utilities are $85
Eating out $150
Entertainment $150

What I’d used to do is minus all of those numbers from $3,000, end up with $1,325.  Usually, much of those expenses were taken out on the first day of the month. I’d live off the balance in my bank account and transfer what’s left at the end of the month to Savings.

This led me to have thousands of dollars unaccounted for at the end of the year.

What changed:

Now, I get my paycheck right away, deduct the savings component, then the expenses as outlined above.  Only when I’ve taken all of those, do I start living off the rest.  The best feature of the zero-based budget is you can still have fun, still eat out and still buy things considered a ‘luxury’.  It does set a limit for those ‘luxuries’ in a month.  If I’ve already eaten out a couple of times this month and don’t have anything left in the “eating out” category, I bring my lunch.  Sometimes the “entertainment” budget rolls into next month if I’m planning to see a concert.

I still allow myself to live and have fun.  But I just set a limit for it.  This way, I don’t feel too deprived and it helps me not to binge out.

And the great news is that since I’ve switched to the zero-based budgeting technique, I’ve hit all my savings goals each year since.  So if you are having trouble finding money at the end of the month for savings, I highly recommend the zero-based budget.  It allows you to better track your money and cash flow to know where your hard earned dollars are going as well as allowing you to make changes to help you progress towards your goal.