OK, let’s get the negatives out of the way first. Making a budget is not what most would call fun, and it may seem like you are placing restrictions on yourself or your family. I don’t have any good tips on making a budget fun. Truthfully I don’t find them very fun myself, but as the saying goes you don’t have to like you just have to do it. I will admit it is nice to see your goals fulfilled through budgeting, so maybe that can help motivate you. As for a budget being restrictive, well, it can be a little bit. If you like to go out to restaurants/bars every weekend but suddenly there is not enough budget money to do that it can be frustrating. However, if the alternative is racking up big credit card debt then maybe cutting back a bit is the smarter move. Notice I said cutting back a little; I am not saying that having a budget means you won’t have any money for fun activities. A budget will help balance going out and having fun with spending too much. The bottom line is that creating a budget may not be tons of fun, and it may feel a bit restrictive, but it is strongly recommended. I consider it an essential part of personal finance.
What is a Budget
A budget is a list of income and expenses over a certain period of time. In other words it is the amount of money you make and all things you spend money on, including the dollar amount spent, over time. A budget reveals your past income and expenses and should serve as a projection of future income and expenses. I recommend setting up a monthly budget because the time-frame of one month is convenient and fairly standardized when it comes to banks and credit card statements. When creating your budget it is important to be thorough and brutally honest. List everything you spend money on, no matter how insignificant, and don’t leave anything out. How you track your expenses is largely up to you. One way is to get receipts for any purchases you can, and write the rest down in a notebook. This method can take a little time, but if you keep up with it each day it won’t take more than a few minutes. Another option if you are a debit card user is to log into your account and just download expenses. Keep in mind if you pay cash or use a credit card you must account for that money also. If you use a credit card for most purchases you can download your purchases similar to a debit card. The important thing is to find a system you can keep up with and be sure to track all expenses. Don’t forget about any automatic bill payments you have also; even that $10 a month for Netflix counts.
How Amy and I Budget
As some of you read about here Amy and I did not have any budget whatsoever for many years. When we finally did make a budget we initially started out with just a basic Excel file that I created back in 2009. The sheet gave us a monthly breakdown as well as an overall summary for each year. We tracked our expenses via debit and credit card statements, as well as bills we paid via check or auto-pay each month. It gave us a good overview of where our money was going each month and allowed us to make changes for the better. Below are a couple screenshots of the sheet we used.
If you would like to use the file for yourself you can download it here: Budget Sheet.
Feel free to modify and adjust the budget sheet to suit your needs. You will also notice there are other tabs for account summary and assets that may be helpful. If you find the budget sheet useful please let me know in the comments. Likewise if you have problems with it or the formulas don’t work properly let me know.
We used the excel file for several years, but in 2015 we started using Mint.com as our primary budgeting tool. To date we have been very happy with Mint; the program has several great features such as:
- Free to use! Yes, there are ads but they are not intrusive and some are helpful.
- Allows you to track all your expenses via hundreds of categories, and you can create your own categories as you see fit.
- Mint will generate very nice pie charts, bar graphs and other means to visualize your finances.
- Allows you to set targets or limits on how much to spend each month on certain categories, and can alert you via text or email when you reach the limits.
- Mint can automatically import data from your bank accounts and credit cards so you can see everything in one spot.
- Mint can remind you about upcoming bills and pay them automatically if you choose.
- Free credit score each month.
- Mint has an app for smart phones as well, but we do not use it at the moment.
The only potential downside to Mint is that you have to allow it the ability to scan your accounts if you want to automatically import data. You can manually enter data if you like, but the automatic importing is very handy and efficient. Mint uses bank level security and we have never had a problem, but please do your own homework and decide for yourself if you want to use it. Below are a just a few examples of Mint and what it looks like.
The bar charts and pie graphs are very nice to see a breakdown of spending. A nice feature is that on the pie chart above you can drill down further by clicking on a category. For example if you click on “food and dining” Mint will show you how much you spent on groceries versus eating out versus fast food. I find that very useful.
If you don’t like Mint or want something different there are other budget programs and software such as Quicken, You Need A Budget, Personal Capital, etc. Your bank may even offer a budgeting tool or software; USAA has recently developed their budgeting tool called USAA Money Manager. I have been using it for a couple weeks now to see how it works and so far it looks good, if it continues to work well I may start using it instead of Mint. If you are already a USAA member I would take a look at Money Manager, it is free to use for members. Some of the these budgeting programs are not free to use, but if it has the features you want it may be worth it. That is up to you decide. My recommendation would be to try a free method first to get your feet wet, then you can better decide if it is worth paying for a budget software.
General Budgeting Tips
No matter what method of budgeting you choose here are a few good tips:
- Try to live below your means.
- Budget for discretionary expenses like books, magazines, entertainment, impulse purchases, snacks, eating out.
- Include quarterly/annual expenses like insurance & property taxes (monthly set-aside).
- Before making any large and/or spur of the moment purchases
- Sleep on it first and/or
- Consult your spouse or a responsible family member
- Forget keeping up with the Joneses, chances are the Joneses are not in a good financial position.
- Shop with frugal people, or alone if you don’t have frugal friends.
- Avoid impulse buys and “negative” influence/peer pressure.
- Automate saving, investing, bill-paying (on-line banking).
- Easier to budget, no late fees, safe, cheap, convenient, helps track spending
I am a fan of the automatic bill pay systems. Once you get them set up you don’t have to worry about them, and you never get hit with late fees or missed payments. I will admit one potential downside to automatic bill paying is that it easy to lose track of the money spent. As an example our car insurance is auto-pay, but unless I pay close attention to the monthly bill I may not realize if they raised our rates slightly (which has happened to us in the past). The other downside I have noticed is that if you change banks/credit cards you must set up the auto-pay all over again, but hopefully you are not having that problem often.
Wrap-Up
Whatever budgeting method you choose the important thing is to create an accurate budget and see where your money is going. Even if you don’t follow the budget exactly just being more seeing your spending and being more conscious of it will help. If you want to start simple please download the excel file I created: Budget Sheet. If you want more automation I would look into one of the free options like USAA or Mint.
When we first started budgeting we were shocked at how much money we spent eating out and miscellaneous shopping. You may be surprised by what you find, so don’t wait too long to get started. The good news is that once you establish your budget and stick to it for a while it almost becomes second nature. We found ourselves not having to worry about purchases too much once we got into a good rhythm. In fact these days I normally open up Mint.com just a few times a month.
Hopefully you now understand why a budget is an important financial tool, especially if you have never created one. I firmly believe your time spent working on a budget will be worth it. If you have any questions don’t hesitate to ask.
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