I’ve always kept a budget, but the method by which I keep track of my spending has evolved over the years. When I first started out, I budgeted by calculating my monthly expenses, and then dividing them by two. I got paid twice each month, so I would deduct half of my monthly expenses from my check register balance each time I got paid. That way, at the end of the month I’d be sure not to spend more than I had available. Doing this enabled me to easily meet all of my financial commitments, while socking away over $40,000 towards the down payment on my house.
I love budgets because they are the road map to organizing our personal finances. They make the journey fun, as they show us how we will successfully arrive at our desired financial destination.
Budgeting Tools and Options
As technology has evolved, so has my method of budgeting. For years I’ve kept an Excel Spreadsheet to track my monthly expenses and income, however free programs available now – such as Mint.com – make keeping a budget easier than ever before. A guest post written for GetRichSlowly.com called How to Find Budgeting Nirvana with Mint.com does a great job at illustrating how to set up a budget using Mint.com.
Before signing up for a service such as Mint.com though, I would recommend working up a quick budget using a program like Excel to get a good idea of where your money goes each month. Putting together a budget will also help you to verify that you have a positive monthly cashflow. If you find that you have a negative monthly cashflow, or are spending more than you make each month, a budget will help you to see why this is happening. Once you know where you’re overspending, it will be much easier to make adjustments to your spending habits. Living within or below your means will both keep you from sinking into debt, and allow you to save for the future.
Many people have numerous different categories in their budgets. I’m a big fan a simplicity, so I try to keep the number of categories in my budget to a minimum. If you like or need more, add more. If you like or need less, delete some.
To help you get started, I’m providing a free Excel Spreadsheet Template you can download that is formatted in the same way as the budget I use. It’s prefilled with hypothetical numbers to give you an idea of how it’s used. I think you’ll find the spreadsheet pretty intuitive, however if you find you have questions, feel free to email me at jenny (at) exconsumer (dot) (com).
Please note that the total monthly income entered should be equal to your after-tax income. This is your take home pay, which is also referred to as your net income. If you’re making pretax retirement fund contributions — such as to a 401k through your workplace — you’ll leave that total out of your total monthly income figure. (As a side note, you should aim to invest 10-15% of your gross — or before-tax — annual income for retirement savings.)
Three Easy Ways to Keep Track of Your Money
Once you have your monthly budget worked out, you will have many options for sticking to your new holy grail of spending. To keep it nice and simple, here are three systems you can use to easily manage your spending. The method you choose will largely depend on your individual needs, and what you think will work best for you.
*When I say “monthly bills,” I’m referring to any fixed monthly expenses you must pay out every month. This can include payments for a mortgage, rent, car insurance, utilities, student loans, credit cards, car loans, personal lines of credit or loans, phones (cell and/or landlines), cable, satellite service, internet service, etc.
*When I say “spending money,” I’m referring to any non-fixed variable monthly expense. This can include things like groceries, gas, personal care items, detergents, haircuts, clothing, gas, gifts, eating out, entertainment, doctor visits, classes or extracurricular activities for your kids and hobbies to name a few.
*When I say “pay yourself,” I’m referring to the popular personal finance advice that says you should always pay yourself before paying anyone else. This means you should dedicate a percentage of your monthly income (ideally 10%-15%), and pay yourself by saving and/or investing that money.
Budgeting Option #1 :: Use the envelope system. This is a budgeting technique where you add up how much you need to *pay yourself and how much you owe in *monthly bills. Once you have this total, you can subtract it from your monthly income to determine how much you have left over to allot for your *spending money. Once you’ve figured out the total amount you’ll need to *pay yourself and your *monthly bills, you can take what ever money is remaining and allot a specific dollar amount to each *spending money category. Next, you’ll put the amount of cash you think you’ll need for each *spending money category in a labeled envelope. If you run out of cash in one envelope, you can borrow from another envelope, but once you’re envelopes are empty – you’re done spending for the month.
Budgeting Option #2 :: Open a spending account. This is the system I use. After figuring out how much money you need for *paying yourself and your *monthly bills, open a separate checking account to be used for your *spending money. Next, transfer all of your *spending money to your newly opened spending account. This keeps all of your spending categories lumped together, but I’ve found it to be the simplest method for keeping a spending budget. To access your *spending money, you can use your debit card or withdrawl cash from your spending account, but once it’s gone, you’re done spending until your next pay period when you can make another deposit.
Budgeting Option #3 :: Deposit your entire paycheck into savings, and then only transfer into your checking account the amount you’ll need for *monthly bills and *spending money. This is a method J.D Roth from GetRichSlowly.org recommends on his blog and in his book, Your Money: The Missing Manual. I thought this sounded like a super easy and effective way for those that have never tried budgeting and saving to get started. First you’ll need to work up a quick budget (use the free download above) to ensure you’re living within or below your means. Once you figure out how to do that, this method is a great way to force yourself to save without giving it much thought.
These ideas should help you get started in creating a budget that works for you. Budgets are important not only to help you identify where your money is going, but also to help you decide where you want your money to go. Many people call this practice “conscious spending.” It’s my opinion that budgets aren’t optional if you want to create a financial plan that allows you build wealth. Without some kind of budget, it’s too easy to piddle away your money and not remember where it went.
What is your favorite budgeting technique? Do you use any of the above mentioned budgeting methods?