Budgeting: Creating and Using Metrics
What are metrics and why use them?
A metric, in this sense, is simply a standard of measurement or a means of measuring your progress toward achieving your financial goals. Anyone can come up with general financial goals and can create budgets to help them achieve these goals; however, there has to be a way of monitoring your progress. Without a means of determining whether or not your budgeting plan is working, or working as effectively as intended, there is no real way to recognize and correct errors or oversights. These metrics will show you if you are on track to achieve your goals within the appropriate time frame or whether you will have to adopt more stringent measures to get yourself where you want to be without resorting to fast cash loans.
Compare spending rates
Most budgeting focuses on saving money by allocating a certain number of dollars for each expense and keeping the expense within that limit. However, to effectively save money you have to know what your previous spending was for that expense and then set your target amount below that level. For example, if you determine you want to save twenty percent on your monthly electricity bill, first you have to know how much you have spent on that bill in the past. Since electricity consumption tends to vary throughout the year, simply basing your twenty percent on your last bill is not very effective. Instead you should track down how much each electricity bill was over the past year and then compare the current month to the same month the year before. Comparing your current spending rate to your past spending rate serves as an excellent metric for determining how successful your expense cutting is.
Monitor all spending carefully
Small amounts frequently add up to significant expenses over time. Little things like buying food for your pet or buying a coffee on your way to work may be costing you more than you suspect. Therefore it is important that you track absolutely all spending, not just major expenses. The easiest methods for doing this are to obtain and record receipts for all of your spending and to ensure that your check book is properly balanced. Today, most the details of most major bills (loan payments, utility and service bills, and so on) can be found through your service provider’s websites, so take the time to register yourself and regularly keep track of how much is being charged and how much you have paid. Tracking your cash flow can serve as an excellent metric to determine your current expenses and give you ideas about how you can trim these expenses.
Keep it simple, pay with cash
Budgeting and effective money management is all about carefully keeping track of your expenditures and even small amounts of money – such as fees connected to your checking or credit accounts – can significantly skew your results. In general, cash is much easier to keep track of because you take out a fixed amount and when it is gone it is readily apparent. Using checks and credit/debit cards is trickier, because many transactions result in additional fees on top of your actual purchase. Since most people have at least some degree of overdraft protection it is much easier to use more money than you actually have with checks or credit cards. Carefully tracking your cash flow, as well using tangible cash for as many expenses as you can, makes it much easier to effectively measure your spending habits because you will notice small expenses much easier.
Be sure to include all expenditures
In many cases, one person in any given household is much more serious about budgeting and tracking expenses than other members. This can lead to misleading results if other members of the household are spending money on expenses that are part of the budgeting effort. You may bring your own miscellaneous household spending down to the desired amount, but if your spouse is spending additional money on household expenses, the budget is being broken. This can be a real problem for household budgeting, like your food bill, where even small, seemingly insignificant additional spending can completely change your measurable results. So it is essential that your metrics include all the appropriate spending, not just the spending done by selected members of the household.
All the metrics in the world will not help you if you do not actively use them to analyze your progress. The whole is idea of the metric is to see how well you are doing and see if there is room for improvement. This means you have to regularly analyze your results and record them. By plotting out your progress you are effectively creating a new metric, one that tracks your success or failure rate and helps you determine what more you need to do. Metrics are tools for analyzing your budgeting progress, but they are quite useless if you do not do the actual performance analysis.