How to improve your budget and estimate future expenses using a Moving Average Expense Index

I’m a big believer of using data to make forecasts and decisions. Having painstakingly logged all my daily expenses for the past 6 months, I felt that it’s a good time to analyse these data to understand how my spendings are like over the past few months.

Mickey Moving Average Expense Index

The Mickey Moving Average Expense (MMAE) Index is an index that tracks the average of my monthly expenses over a period of time. As I have 6 months worth of data on hand, I decided to work with a 6-month MMAE Index for a start. Ultimately, I hope to work with a 12-month MMAE Index once I have sufficient data.

How does it work?

Averaging my monthly expenses for the last 6 months, the MMAE Index predicts how much I would be spending each month based on my spending habits. As of today, the MMAE Index is 2967 (rounded to the nearest number) and this means if I decide to go on a 3-month sabbatical, I would need $8,901 (2967 x 3) to cover all my living expenses.

Although some may argue that they would definitely spend much lesser when going on a sabbatical, I feel that the MMAE Index is just simple mathematics that helps to shed some light on my monthly spendings. I can always reduce the Index by 5-10% to make the sabbatical expense calculation more realistic.

Using MMAE Index to improve my personal budget and expenses

As the Index uses a moving average calculation, it means that this month, the Index uses the figures from October 2014 to March 2015 and next month the Index will use the figures from November 2014 to April 2015. This means that the Index would goes up or down depending on how my spending habits changes. Ideally I would want the MMAE Index to go down and in order to do that, I will need to improve my spending habits.

The MMAE Index is also useful in targeted budget planning. I would use the MMAE Index breakdown for each category such as Transport, Shopping, Food, etc. and use those figures as my budget for the month.

For example, the MMAE Index for transport is $76 and I will set this figure as my transport budget for this month. I can also exercise some flexibility in my budgeting to challenge myself to spend less. A good example would be the MMAE Index for food which is currently $516.82 which I feel is a bit too high. So I use the figure as a benchmark and target to spend only 90% of that. So my food budget for the month will only be $465.14 which will be a challenging, yet achievable target to to reduce my expenses.

While the MMAE Index sounds like a good idea, I plan to use it and see how it can be improved further.