Tuesday, December 29, 2015

How Did You Do This Year?

The purpose of this quick post is to encourage you to track and save a comparison of your actual spending vs. your spending budget every year in your spending budget file.  If your spending budget significantly deviates from the budget determined using the Actuarial Approach, you may also want to track that difference.  While the Actuarial Approach automatically adjusts your future budgets for actual investment experience and actual spending (if used without smoothing), it can be helpful for future budget setting purposes to have a sense of how well you have done historically when it comes to following your spending budget.  For example, if your history shows that you have constantly overspent your budget, you may be understating your spending needs when developing  your budget.  Or, if your history shows that your overspending relative to your budget is increasing from year to year, this can be a signal of financial problems on the horizon.  On the other hand, a history of ever widening under-spending relative to budget  provides evidence that you may be too conservative with your spending. 

Do you need to track your spending exactly?  While it may be helpful to do so,  particularly if you develop your spending budget as the sum of several different categories,  it probably isn't necessary.  If you know all of the items in the equation below other than your spending, you can solve for the amount you spent during the year.

End of Year Assets = Beginning of year assets + investment income + income from other sources (such as Social Security, pensions, annuities, etc.) - amount spent

Regarding the other important assumptions used in developing your spending budget, you can also track how well you did on your investments vs. your assumed rate of return and actual inflation vs. assumed inflation.  Of course, every year that you and your significant other (if you have one) survive to work on a new year's spending budget should be considered a good year. 

Happy budgeting and wishing you all the best in the upcoming year.