I hate budgeting. I’ve tried using envelopes, Mvelopes, Quicken, and fancy spreadsheets and the results are always the same. I start off strong, but within a few weeks I lose interest in the time-consuming chore that budgeting can be. The problem is that I still need to manage my money. I confronted this problem about a year ago, and asked myself the following question: how do I effectively manage my money in as little time and with as little pain as possible? To answer that question I came up with a money management plan that doesn’t require me to track all of my expenses all of the time, and requires a relatively small investment of my time each month. In this post, I’ll share my plan with you.
Before I get to the steps I take, it’s important to say that you should do what works best for you. You may need to or feel more comfortable tracking every dime you spend. That’s great if it works for you. You may also take my plan and modify it in ways to make it work better for you. That’s great, too. Budgeting should be viewed as a means to an end. Budgeting and money management are a means to allow us to spend and save our money in the most productive and efficient way possible. If you need 100 expenses categories to accomplish that goal, so be it. If you can do it with just 5 expense categories, great! It turns out that I use just one expense category most of the time. Here’s how:
You’ve heard the expression, “pay yourself first.” What that means is to set aside a set amount from each paycheck that you’ll save, then spend the rest. That’s what I do, and my budget looks like this (all percentages are based on gross income):
As long as I save 15% of my gross income and spend no more than 85%, I don’t care how much I spent on groceries or entertainment or electricity. Unfortunately, the fun doesn’t stop here. There are at least three potentially significant problems with this simple approach that you must watch for: (1) failing to save as much as you comfortably can; (2) spending more than you planned to spend; and (3) getting whacked by periodic or unexpected expenses. Recognizing these potential problems, I developed a simple approach to address each of them.
Failing to save as much as you comfortably can
How much money should you save? There’s no one right answer to that question. The goal is to achieve a reasonable balance between enjoying today and saving for tomorrow. For me that means saving between 10% and 20% of gross income. I view 10% as the minimum goal and 20% as a stretch goal. Today I save 15%. But what if I could comfortably save more? That’s one of the potential draw backs to my simple budgeting plan. In and of itself, it doesn’t tell you how much you can reasonably and comfortably save. To determine that number I prepare a budget template. I use a simple Excel spreadsheet that divides my monthly expenses into three categories: (1) fixed expenses (e.g., mortgage, telephone, cable); (2) variable expenses (e.g., groceries, entertainment, clothing); and (3) periodic expenses (e.g., car and life insurance, gifts, vacations). The fixed and periodic expenses are easy to determine by looking at past bills. The variable expenses can take some time to pull together, although if you religiously use a debit card like we do, the information is right there in your bank statement.
With this information plugged into my spreadsheet, I can get an idea of how much (or little) I can save. I can also see how making adjustments to my spending will increase or decrease my savings. What I don’t do is track all of my expenses each month according to these categories. The template is there just as a guideline to determine how much I can reasonably save. If I’m not at 10%, I look for ways to trim expenses in one or more categories. I also look to see if I can reduce my expenses in some relatively painless way in order to save even more. You can check out some of my painless money-saving tips, which I will regularly update with new tips readers and other bloggers have sent in. At this point you may be asking how I keep my expenses in check against this budget template if I don’t track all my expenses each month. Good question, and that brings us to problem #2.
Spending more than you plan to spend
So you have a simple budget plan that calls for 10% savings, but you end up spending more than the 90% left over. This happens to all of us. But rather than go to the extreme and start tracking every expense, I look at my expenses and determine what category or categories caused me the most problems. The problem expense areas are usually not a surprise to me. For us, it’s spending too much money eating out, buying too many clothes, or spending too much on the house. I know these are our problem areas because I’ve been managing our money for 15 years. If you’re new to managing your money, it won’t take long for you to identify the two or three problem areas in your budget. And here’s the point–track just those categories for a month. There’s no point in tracking expenses that aren’t causing the problem. Focus on the problem. You’ll spend a lot less time and your energy will be directed at the problem area(s) in your budget.
Having tracked the problem areas for a month, you’ll have a better idea of why your spending more than you should. If you must, put cash in an envelope for just these problem categories. When the cash is gone, you stop spending. Again, the point is to focus just on the problem areas of your monthly spending.
Getting whacked by periodic or unexpected expenses
It’s usually just when you think you’ve got control of your spending that the car insurance bill comes in the mail. In the past, this would drive me (no pun intended) crazy. Not any more. For periodic expenses, I simply add them up over the course of a year, divide by twelve, and put that much into my online savings account each month. When the bill comes in, I transfer the amount from savings to checking and pay the bill. For us, our periodic expenses include the following:
- Car Insurance (twice a year)
- Life insurance (once a year)
- Personal Property Tax (once a year)
- Gifts (throughout the year, but mainly at Christmas)
- Vacations (once a year)
For unexpected expenses, like a car repair, we use our emergency fund if we can’t include it in the monthly budget. Of course, we then have to add to our emergency fund, but that is what it’s there for.
As I said at the start, there is no one right way to budget. For us, the simple approach is the best, and we’ve managed to control our spending with the system quite well. If you use a different system, let us know what works best for you.