How can you budget like a Zen master without tracking every dime you spend? How do you budget for those oddball expenses that pop up from time to time? As someone who goes in budgeting spurts, I’ve learned the hard way how to make our budget work.
Recently, this has been at the forefront of my mind as I've worked to refocus our family budget. I tend to go hot and cold with budgeting. Sometimes I'll go months without a formal budget, and I always wind up regretting it.
This weekend I fired up my copy of YNAB (You Need a Budget). I’ve been very focused on budgeting lately. I want to control our spending so that there are no surprises at the end of the month.
It had been several months since I looked at our budget. In fact, I had to reset YNAB and start from scratch. In the process, I realized that there are certain shortcuts I take with our budget. These shortcuts do not diminish the effectiveness of our budget. They do diminish the headaches that can come with trying to track every dime you spend.
So with that in mind, I want to share with you these 7 tips that guide my approach to budgeting.
(If you get to the end of the list and have other great tips for budgeting like a Zen master, shoot me an email to let me know.)
1. Begin with the end in mind
This is probably the most important tip I can give you. You have to understand why you're budgeting in the first place. If you understand that, you'll have built-in answers to many of the questions that come up during the budgeting process.
For example, how many categories should you track? Which expenses are most important for you to track? Which tools, if any, should you use - YNAB, Mint.com, Quicken, Excel, or an old-fashioned pencil and paper?
Before you can answer these questions, you need to consider why you're on a budget in the first place. For my family - and I think for most people - a budget is a way to control spending. To do that, I need to understand, to a point, where our money is going.
I don't need to track every single dime. I do need to have a good enough idea of where our money is going. So I need to have enough details in the budget that allow me to control spending. And I also need to know exactly how much money I have available to spend. For me, it's not good enough to review my budget once a month. I need to have a good idea of where I stand in the middle of the month, as I make spending decisions.
For example, how do you budget for one-off expenses? That question came up for me this weekend. We had to renew our car registration. For us, this isn’t an annual expense. In Virginia, you can renew two years at a time. So this expense only comes up every two years. I was surprised at how much it was. It was $134 for each year, so I spent over $260 to renew the license plate on my Camry for two years.
How do I deal with that expense in the budget? It's not an insignificant expense, but it's only going to come up once every two years. Do I want a separate car registration fee category? I could take that approach, but it would further complicate my budget.
Instead, I just have a general fees category that covers everything from car registration to postage. A lot of things go in that category. As an attorney, I have fees related to my law practice. And we pay $25 a year for our dog's pet license fee. I don't need to track all these fees individually to achieve the goals I've set for our budget. So I have a generic fees category that they all get tossed into. If I ever need to look deeper into exactly what went into that category, I can. I never do.
For the car registration fee, I have an overarching category for car expenses. It doesn't include major repairs, which I'd put as part of a rainy day fund. But it includes the small fees - registration fees, state inspection fees, license fees, emissions inspection fees, etc. Since I want to track how much our car costs us - above and beyond periodic repairs - I created a separate category for car-related expenses.
For me, it always comes back to the reason I'm budgeting - to control spending. I'm not likely to spend $100 at the post office any time soon, so that's fine to lump that expense into a larger category. But I do like to know how much our cars are costing us, so it's worth my time to track car-related expenses separately.
Related: Best Expense Tracker Apps
2. Keep it simple
Regardless of why and how you budget, keep it simple. How many categories do you really need? The fewer the better.
For example, when I look at my categories, if we aren't spending at least $100 per month in each category, I tend to lump it into a larger category. Maybe you're on a tight budget and need to track down to $50 per category. Or maybe your numbers are higher, and you don't need to worry about anything under $250 or $500.
We're all different with different incomes and expenses. But whatever that number is for you, if you see a category that consistently only costs $20-$30 per month, you may be able to roll it into another category. Just combine them to make things simpler.
For instance, I combined our phone, internet, and cable bills into one budget category. For one, we have a bundled package right now for some of those services. But I also don't need to separate out our home phone versus internet or cable because that doesn't help me achieve our budgeting goals.
On the other hand, I do keep the cell phone bill in its own category. For one, it’s much more expensive than the other three utilities. I’m also currently on a warpath to get that cell phone bill down, so I want to keep it separate. Bottom line is to keep things as simple as you can.
Here's one tip to help you keep a simple budget--I call it budgeting by the store.
I'm sure this has happened to you. You sent down to categorize your spending for a week or month. As you work through receipts from retail stores, you have no idea what was purchased. For example, a receipt from a pharmacy could be for a prescription, household goods, beauty products, or even groceries. It could also be for a combination of those categories of expenses. So how do you record that expense?
You can always get out the receipt and break it down. But to me, that's just too much effort, and it doesn't really move me towards my goals. So I budget by store.
For instance, I have a category called “pharma,” which just rolls in whatever pharmacies we might shop at - Walgreens, CVS, Rite Aid. Not everything we buy at a pharmacy is from the pharmacy, of course. But what we spend at those stores each month isn’t significant. So I just lump it all together and record it as “pharma.” If I want to drill down one month to see why we spent more than normal in that category, I can.
I do something similar with Home Depot and Lowes, both of which get categorized as home repair. I categorize purchases at grocery stores as "groceries." The budget by store approach doesn't hurt my ability to control my spending, but it does make budgeting a lot easier.
3. Have master categories
This is easiest in YNAB because it has master categories by default. The two most important master categories are fixed monthly bills (e.g., rent, phone, internet, cable, utilities, a gym membership, etc.) and everyday expenses (e.g., groceries, gas, spending money, clothing, restaurants, etc.). Master categories help me understand my spending quickly and focus my attention on problem areas.
I also want to focus on fixed monthly bills separately from everyday expenses because the way I control my spending in those two big categories is different. The "one-n-done" method of saving money, which I talk about in this podcast, generally applies to fixed monthly bills. I look at these bills and ask--How can I lower those expenses? What changes can I make to lower the cost?
For everyday expenses, the questions I'm asking are different. Do I really need to spend that much money eating out? Why do we spend so much on groceries? Can we get better deals?
The approaches are a little different, so that's why I like to have master categories for my budget. In my case, I have just a couple of master categories. I have a giving category where we give money to our church and other charities. I have one for fixed monthly bills, and one for everyday expenses. I also have a rainy day fund category, which includes periodic expenses like gifts, life insurance, car insurance, and car repairs. And then I have some savings goals.
That's it. Those are my main categories. And sometimes, I can look at my budget at just that level. I can still drill down into the sub-categories, but having these master categories can be very useful.
4. Use your credit or debit card as much as possible
Using your credit card or debit card makes tracking your spending so much easier. On YNAB, I just download all of our credit cards and checking account transactions and then upload them to YNAB. It takes just a couple of seconds. Then, I can go in and categorize spending - much of which is actually automated. It’s very simple.
If you spend a lot of cash, though, you have to track your receipts, which is just more time-consuming. It’s a headache. Plastic is more secure, and I earn rewards from credit card charges. And it’s easier to track.
Even if you use plastic, there will be times when you hit the ATM for some cash. How do you deal with ATM withdrawals without tracking every dime? We have a category called "Spending Money" for this purpose. I don't track cash we spend beyond this one category. That works for us because we don't have a lot of ATM withdrawals. If you do, you may need to track it more closely.
5. Master your cards
How do you deal with your credit cards in your budget? It's important, so I've got three tips to give you:
Budget for existing debt
First, if you’re setting up a budget and you have some credit card debt you want to pay off, list it as a budget item. YNAB actually does this already. They call it “pre-YNAB debt.” Each month, you allocate a certain amount to pay down your existing credit card debt, just like you would with rent, mortgage, phone, or any other spending category. It’s a budget item no different than any other.
Budget for future expenses
What about future spending on credit cards for things like groceries and gas? The best way is to treat a credit card just like you would a checking account. I download the transactions from the credit card company, which is easy to do, and upload them to YNAB so I can categorize the transactions.
What's interesting is that my budget will then show that I'm spending money as I allocate a credit card purchase to its relevant spending category. Because the expense was charged, however, I haven't spent any of the money out of my checking account.
When it comes time to pay the credit card bill, that payment is not a budget item. It’s simply a transfer from my checking account to my credit card bill. I don’t have to put that payment into a budget category because I’ve already budgeted each of the transactions that make up my credit card bill as I’ve incurred them.
A little of both
Chances are that if you’re just starting a budget, you’ll have a little bit of both. Even if you usually pay your credit card bill in full each month, at any point in time, you could have a balance on a credit card. And then if you keep using the card, you’ll have both an existing balance and new expenses. So how do you deal with this situation?
With YNAB, when you set up your budget for the first time, you classify your existing balance – whether you set up your budget at the beginning or in the middle of the month – as pre-YNAB debt. Even if you’re going to pay it off in full in a week, any existing debt counts as debt.
When you pay that debt, you’ll record it as a budget item. And eventually, that pre-YNAB debt will be gone. Then, as you continue to use that card for monthly purchases, you’ll categorize those expenses as you would if you were using a debit card. Then when it comes time to pay off your credit card bill, the actual payment doesn’t affect your budget. It’s just a transfer from one account–your checking account–to another–your credit card.
Once you wrap your mind around this, it actually makes dealing with credit cards very simple.
6. Budget for periodic expenses
I've touched on this a little, but you need to budget for your periodic expenses. For most people, this includes insurance, car and home repairs, gifts, and vacations. It's important to set aside money for each of these things every month. The money will build up over time, of course. Some people leave that cash in their checking account until the expense comes due. If that's too much temptation, move it to a savings account.
7. Review your budget weekly
Finally, review your budget at least weekly. There's no one-size-fits-all here. You may not have to do that, but most people do need to check out the budget once a week to understand where money is going and how much is left for that month. I know I do.
My personal budgeting goal is to control my spending. A weekly budget review helps me do that. Again, with YNAB, Mint.com, Quicken, or even Excel, it’s easy. Whatever your budgeting tool of choice, I think it’s important to review it at least weekly.
So these are my seven tips for budgeting like a Zen master. If you have any other tips to add, leave them in the comments below.
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