Readers got into this discussion a bit in the comments to Monday’s resolution post, but I thought I’d continue the discussion here, because I think it’s a worthwhile one. So let’s talk budgets… (Pictured: Comme des Garcons Polka Dot Leather Wallet, available at Saks for $235.)
First, I would say that not everyone needs a budget. Your goal should be to spend less than you earn, and sometimes you can accomplish this — easily — without really keeping track of expenses. For example, if you’re making more money than you know what to do with (lucky you!), setting a general monthly goal (such as moving the second paycheck of every month into savings) should be fine, after maxing out your 401K and taking a close look at your debts. But maybe you’ve recently switched to a lower-paying job and want to keep a closer eye on your finances — or perhaps you’re setting new goals for yourself this year, such as paying off debts, saving a greater amount, or saving towards a goal like a house or car. Or maybe that goal of “spend less than you earn” has been eluding you for quite some time.
How to determine your budget? Everyone has slightly different methods of this, as you’ll note from the reader comments on Monday. Personally, while I use Mint.com to generally keep an eye on our accounts and to track trends, I have always just used plain old Excel to keep track of a budget. My own tip for budgeting is that I like to get ahead of the ball, so last month’s income goes to pay for this month’s expenses. If the end of the month draws near and the money starts to dwindle, we do our best to stop spending (and, for example, opt to eat in rather than head to a restaurant, or I don’t buy that pair of shoes I see online, or I bring a can of soup for lunch instead of going out for soup). (Disclosure here: My husband and I have totally combined our finances, I’m in charge of the money, and I’m also the primary spender — so this may be easier for me.)
More specifics: On my chart, I first have the total combined income from last month (after taxes and whatever else is taken out). Then I have different lines for fixed expenses — and for me these are only non-negotiables: mortgage payment, common charges payment, debt payment, various insurances (amortized over 12 months if it’s something we pay yearly). Then, I have our goals for the month — usually it’s a set amount of savings for retirement, but it might also be savings to pay off a particular student loan, or something like that. And then I subtract — income minus debts minus savings. And whatever’s left is the budget for the month. I generally just keep track of cash withdrawals rather than cash expenditures (so if we get $100 out of the ATM I’ll track that rather than whatever we spend the $100 on), and in general I use Mint to keep track of what money is spent when. (Then I just have to log into Mint and copy the latest expenditures to the chart.) I don’t include things like credit card payments on the “budget” (as the expenses should have been individually included when they were incurred). As far as extra income goes, I’ll keep track of some of it — money received after returning a purchase, for example, a Christmas check from my grandmother, or interest from our savings account — but other stuff (e.g., paychecks) don’t get counted. As the month goes on I’ll bold things that are deductible — business dinners, charity contributions, etc. — and copy them into a separate column, which makes taxes a breeze at the end of the year. When the month ends, I start a new sheet in Excel.
If you adopt a system like mine, I’d suggest giving yourself a few months just to get used to tracking your expenses and seeing where the money goes. (And Mint can be great to keep track of spending in categories — it’ll even let you set budgets for the category and track them.) After a few months, take a look at things and try to get a better sense of where it’s “too much,” either because you’re spending beyond your means or you’re spending more than you really care to. For example, you may have a souped up internet/phone/cable TV package, but a) never watch 95% of the channels you receive, and b) never use your landline. You may be able to significantly reduce your monthly bill every month without feeling any pain with the cuts. You may also realize that you have leftover savings every month that should be allocated elsewhere — instead of leaving it to chance it might be time to put that $200 or $300 towards a student loan, or in a fund for a savings goal.
Personally I prefer to just have a general “bucket” budget rather than a category-by-category budget, but that’s just me. Readers, how do you do your budgets? Have you always had one, or were there times in your life that you haven’t kept track of money?