the joy of budgeting

budget_cuts Most people hate budgeting. I love it. I’m a very enthusiastic budgeter, and I hope to share some of that enthusiasm with you. I’ve been keeping a budget for about 6 years, using a detailed (to the cent) budget now for the last 4 years.

The main criticism of budgeting is that it is restricting. In one sense this criticism is valid – a budget is meant to be restricting. It is meant to prevent you from spending recklessly and getting into debt.

Rather than be restricting however, the truth is that keeping a budget is liberating. It frees you from debt slavery.  It helps you reach your financial goals. It helps you to see areas where you spend without thinking, and enables you rechannel that money to spending on things you really want.

Creating a budget is one of the first steps to being in control of your finances. It makes you aware of how much you’re earning, how much you’re spending and on what, how much you’re saving and how much you’re relying on debt. It enables you to know what your financial habits are and what your financial situation is.

There are many methods of keeping a budget, the important thing is to find a method that works well for you. A budget is a financial tool to help you reach your financial goals. As long as your budget is assisting you, there is no right or wrong way of doing it.

I’m a fan of the ‘devil-in-the-detail’ method. You don’t get the same kind of detailed information budgeting other ways, but I’ll include an alternative method nevertheless.

Budgeting Overview

1. Begin by tracking your expenses. If you started tracking your expenses in January you will have some great data to base your budget on. This information makes your budget more realistic.

Further reading: Tracking your expenses

2. Organise the expenses that you tracked into categories. You might have a household category, a groceries category, a utilities category, an entertainment category. You can break your expenses down to be as specific as is useful to you.

3. Create your budget and plug in your expected income and expenses for the year. Paper and pen work fine here, but a spreadsheet can make this job much easier.

Further reading:

4. Continue to track expenses and compare them to your budget. A budget is only useful if you use it. Rather than just creating it and sticking it in a drawer to be forgotten, update your budget regularly with your actual income and expenses to compare these figures with your budgeted figures.

5. Make adjustments as necessary. Your budget isn’t set in stone. Your circumstances might change, your goals might change, expenses that you didn’t predict may come up. Adjust your budget as necessary to reflect the reality of your circumstances and your goals. It is meant to be a useful tool, not a test to see how psychic you are.

6. Monitor your progress and keep your budget up to date. Are you on track to meet your financial goals? Where are you excelling, what are your weakest areas? Having a budget makes it easy to answer these questions at a glance.

Further reading: Monitoring Your Progress

An Alternative: Creating A Spending Plan

While you will get more out of keeping a detailed budget, if you feel like this is just not for you, an alternative is to creating a spending plan. The steps are as follows:

1. Automatically deduct a percentage of your income at every pay that goes towards your savings including saving for an emergency fund and irregular spending such as holidays.

2. Automatically deduct a percentage of your income to go towards a retirement fund

3. Automatically deduct a percentage of your income to go towards debt repayments

4. Allocate a percentage of your pay to committed expenses such as mortgage, food, utilities etc

5. Spend the rest freely on whatever you like

The idea is that once you’ve got the basics covered, you don’t need to be tracking your expenses as you do in a complete budget. The key to the success of this plan is know how much you will need each pay for committed expenses including saving for those that are paid once a year etc, and not getting into debt. The whole point of doing a budget is to avoid spending more than you earn. If ‘spend the rest’ involves putting expenses on your credit card, it won’t be long until your finances get out of hand. A popular way around this is to use the envelope system and actually withdraw and spend cash only.

Finally, an alternate method somewhere in between the two above is to create a zero based budget, where every dollar you earn is somehow allocated (including to savings). If budgeting for a whole year isn’t working for you, you could budget monthly. However, have a go at doing it yearly, it makes it easier to save for up coming expenses and see the “big picture” of your finances.

Budgeting Resources

Creating your own personalised budget gives you customised flexibility. However, there are plenty of other options available. If you’re interested in the budget I use, you can download an Excel 93 compatible version or a 2007 version. Google docs also have some spreadsheet budget templates to use.

Below are some other popular budgeting tools:

  • The Australian Government’s Website, Understanding Money offers a free excel budget planner to download, or an alternative PDF printable version.
  • Pear Budgeting – This is a very popular online budgeting tool. It isn’t free, but at $3 per month, it’s not massively expensive. It’s popularity is based on it’s simplicity. I’ve tried the free trial, and it is extremely straight forward to use but not specific enough for what I like to track.
  • Pear Budgeting Spreadsheet – A free alternative to the online budgeting tool is Pear’s downloadable spreadsheet. It’s pretty good, but limited.
  • Easy Budgeting – Another spreadsheet. I’ve paid for and tried this one. It’s not a bad spreadsheet actually. It is Australian and only $5.
  • Spendtracker – Another popular budgeting tool. I haven’t used it so I can’t say whether it’s any good.
  • Quicken Desktop Australia – I did a review on Quicken that basically concluded that it’s good, but probably way more than what the average person needs to use to keep track of their budget. I have used QuickBooks working as an accountant, and still found Quicken difficult to navigate and get used to. Quicken is based on good accounting practices and so has a bank reconciliation facility.
  • Just Budget – a free online budgeting tool. I haven’t used this, so I can’t say if it’s any good or not.
  • GNUCash – is another popular free online budgeting programme. It is probably more geared to small business than the individual and is based on professional accounting principles.

US based budgeting resources. Some of these can be used by non-US residents, although you won’t be able to use all the features like automatic banking and bill paying. These websites state that they plan to be ‘international’ in the future, so if you’re keen on the software, hassle them to add your bank.

  • Mint.com – US based free online budgeting tool. By US based, I mean that it synchronises with your bank accounts to make budgeting and reconciliation easier.
  • Mvelopes – another popular US based online budgeting tool based on the envelopes budgeting system. This one is not free. It claims to support some Australian financial institutions, the only two that I could find was BankWest and AMEX Aust. The programme can still be used outside the US, but not the full features.
  • You Need A Budget – Another popular budgeting tool, to download ($60 US cost) it is based on 4 principles of money management and uses the envelope system of budgeting. While you can use it anywhere, it is only fully featured (bill payments automatic bank recs etc) if you’re in the US.

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