If you clicked over to this post even knowing that it’s about budgeting, kudos to you! I hate budgeting. It’s annoying and boring. Perhaps that admission is not very reassuring, especially coming from an accountant, but it’s the truth. That being said, as boring and annoying as it is, budgeting is necessary. It may be annoying to plan and track a budget, but it’s more annoying to have your credit card declined at the grocery store because you’re over the limit. It may be boring to crunch numbers to form a budget, but hours of bankruptcy proceedings can’t be all that thrilling either.
Budgeting really has two stages to it. One is to decide what you’re going to spend in each category (food, clothing, transportation, etc.), and the other is to keep track of where your money goes to contain your spending as close to your plan as possible. In an ideal world, you’d plan first and then keep track. The problem with the ideal is that if you haven’t been keeping track at all until now, how on earth are you supposed to decide how much is reasonable in each category? For that reason, I like to start with keeping track.
There are two basic ways to keep track of your money: Pencil & paper/calculator, or electronically.
Writing it down
The simplest way to keep track is to write it down every time you spend money on anything. Bought a coffee on the way to work? Your notepad would say “Coffee – $2” (or whatever amount you happen to pay for coffee). At the end of the month, you’d add up all your coffee entries to see how much you’ve spent on coffee. The same procedure would be repeated for each different budget category.
This system works well because it is quick when the money is being spent. It takes less than 10 seconds to write something down, and then it’s done. You’re more likely to do it, and less likely to forget about various expenses. You’re also capturing all your expenses whether you pay cash or by debit card. Credit card purchases can be added in too, but hopefully you’re not using credit cards while in a credit crunch! When you’ve got a few minutes at the end of the month, you can do your tallies with a calculator, or input the data into a spreadsheet.
The down side of this method is the work required at the end of the month. It’s a lot of adding & tallying or inputting data a second time into a spreadsheet. Once you’re used to it, it should be fairly quick, but if you’re not disciplined enough to sit down and do it, then the whole system could easily fall by the wayside.
Electronically with a smart phone app
Personal finance apps on Blackberry and iphone are endless. I took a brief look at a few on each platform for the purposes of writing this post. I was not impressed with any of them. There was one iphone app that came close, but the subscription fee was quite expensive. Has anyone used a personal finance app on Blackberry or iphone that they are happy with? Please let me know as I’d like to look at this in more detail for a future post.
Electronically with a desktop app
I’ve been using Microsoft Money for expense tracking for quite some time. So long, in fact, that they no longer make the software so I can’t even recommend it to you. There are alternatives out there. Generally speaking, desktop software is going to give you more functionality and details, but it’s not terribly practical for entering expenses directly at the time of purchase. Debit and credit card transactions can be downloaded into the software and categorized. For example, I usually download our transactions once a week and categorize them. For our household, that’s enough to keep us on track. If you could do major damage to your wallet in a week, then you should download the transactions more often. Logging in, downloading, and categorizing is a fairly quick process.
Some bank sites will categorize & total expenses for you within online banking once you set it up. You can even link other accounts from other financial institutions. Before going to the effort of setting this up, I would verify what happens to your data if you switch banks. Can you download it somehow?
What about envelopes?
The envelope system can work well once you have decided how much you’re going to spend in each category. When you get paid, you withdraw the amount in cash for your purchases for the week or month or however long you’re going to budget for each time. You separate the money into envelopes for each category. For example, if you’ve decided that you’re going to spend $100 on food, $25 on clothing, and $60 on transportation, you would put $100 in one envelope and label it “food”, $25 in a second envelope and label it “clothing”, and $60 in a third envelope and label it “transportation”. You’d repeat this process for each category that you have. Then, every time you spend money in a certain category, you take the cash out of that particular envelope to cover it.
The good thing about this system is that it eliminates the need for keeping records of purchases. You know how much you’ve spent on a particular category by virtue of subtracting how much is left in the envelope from what you started with. Categories like clothing would build up over a number of months and then get spent in spurts for back-to-school, season changes, etc.
The annoying thing about this category would be keeping track of all the envelopes. Do you carry all that cash around with you all the time? If you go to Costco and you buy some food and clothes, do you pay separately or have to pull money from each envelope on the spot? I can see that getting old really quickly. However, if you really hate record keeping, this may be a better system for you. Once you have an idea of how much to allocate to each category, then you could use this system instead of one of the record keeping systems noted above.
I’ve kept track – now what?
Once you’ve been keeping track for a month or two, you can make decisions based on the data. If you’ve spent too much on a certain category, then you can concentrate your efforts on reducing that. Perhaps set your budget a bit lower the next month and then lower still the month after that until you get it to the amount that you feel is acceptable based on your priorities. There is no right or wrong amount to spend in each category. The important thing is to have your total expenses be less than your total income after taxes and debt repayment. Each amount that you save on your expenses will enable you to pay down your debt faster. Balancing your budget will also keep you from going further into debt.
Assignment for the week
Choose a system for keeping track of your purchases and then use it. Let me know how it goes!
Coming up next week… preventing relapse