Overspent Our Budget

Soon after taking early retirement in October 2007, I put together an expense budget, which was adjusted in May 2009 to reflect paying off my mortgage.  Since I am not a fan of detailed monthly budgeting, I tracked the spending by simply transferring the monthly budget amount from savings to checking, which is our spending account.  Additional one month of expenses was put in the checking account as a buffer to prevent overdraft charges.

This process worked great for the first three years.  We were operating withing budget.  My spouse who tracked the monthly household spending agreed with me that the budget was being met.  However, in the last two years, my spouse claimed she was overspending by 7% based on her tracking while I thought she was underspending by 7% based on the increase in the checking account balance.

Who was right?

My spouse was and here's what happened.  In the first three years, we needed to pay estimated federal and state taxes which came from our budget and checking account.   In the last two years, I've exercised stock options which have withheld federal/state taxes and therefore, we did not pay any estimated taxes.   Our budget for taxes is about 14%

If we were on budget, our checking account would have grown by 14% of our annual budget each year.  But we overspent by 7%, which reduced our checking account growth to only 7%.

At this point, I think it makes sense to adjust our budget upwards.  Despite the Fed claim of low inflation, our food costs and other expenses have significantly increased.   Probably, an increase around 10% would be appropriate to consider.  In addition, adjustments need to be made for years when taxes are withheld.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2012 Achievement Catalyst, LLC