The key is to put your money on autopilot.

Why does something so simple matter so much?

THE BEHAVIOR GAP

Because we’re human, and we do stupid things. In his blog and new book by the same name, doodling financial planner Carl Richards coins this “The Behavior Gap“.

Looking at the long-term returns of investments like the S&P 500 compared to the returns of individual investors, Richards found that the investors consistently did worse than the investments. He explains the difference, The Behavior Gap, as humans’ tendency to let emotions influence decisions (for example, to sell off stocks during scary economic times or buy a particular stock based on a tip in the financial media).

Emotions can lead us to make a lot of terrible financial decisions like:

• Making a big purchase you can’t yet afford—perhaps an engagement ring or a wedding dress—on a 19% APR credit card.
• Taking on too big a mortgage because it’s “your dream house”.
• Cashing out your 401(k) because you’ll “feel more secure” with cash in hand.

Putting your money on autopilot can’t stop us from all of the stupid things we do, but it goes a long way in protecting ourselves from two of the most common:

• Ceding to temptation.
• Being lazy.

TEMPTATION

Emotional decision-making is part of the problem; pure temptation is another. If you have ever tried to resist a temptation—to turn down an extra drink, to surf YouTube instead of working, to buy something you shouldn’t—and failed, you know what I mean.

Psychologists have shows that although it is possible to stretch and strengthen our willpower like a muscle, our ability to self-regulate is a consumable resource that depletes. What this means is:

• The more we exercise self-control, the better we become at it in the long-run.
• BUT, the more we use self-control in the short-run, the harder it becomes in the short-run (Muraven and Baumeister, 2000).

So if you focus on not procrastinating every day for a month, you may find it easier to diet next month. But if you’ve had a particularly exhausting, stressful day at the office and you’ve been fighting off distractions to get stuff done, resisting the candy bars in the checkout aisle (or going out to dinner even though you don’t have the money) may be all but impossible.

Although we can work to improve our self-control in the long run, as humans we’ll always be susceptible to moments of weakness when our self-control is depleted. To prepare for this inevitability, we can alter our environments to remove or reduce temptations.

An obvious example is that cliché advice that debtors should cut up their credit cards or put them in a block of ice. The next time your willpower is depleted and you want to charge the Forever Lazy you saw on a late-night infomercial, you may have second thoughts by the time your Visa defrosts.

LAZINESS

Sometime we do stupid stuff because we are emotional or tempted. And sometimes we’re just lazy.

If you currently pay for a monthly subscription that you don’t use—a gym, a magazine, $12 a month for DVR service on cable—and don’t do anything about it, whose fault is it? The recurring-subscription business model that gyms, cable companies, and Netflix use is one of the most stable and profitable in existence. And guess what? It is built on the simple fact that people are lazy. When we stop using something, most people will pay $20 or more each month for many months before making a 10 minute phone call to cancel.

Laziness hurts our wallets in all sorts of ways.

Overspending on credit cards or paying for unused subscriptions are just a couple of ways our behavior sabotages our finances. Other examples include:

• Forgetting to pay bills, incurring late fees and credit penalties
• Depleting savings by comingling them with everyday spending money
• Failing to invest enough for retirement
• Failing to invest in regular intervals

There may be different reasons for making these mistakes, but don’t discount laziness. If you’ve ever thought of cancelling something you don’t use or opening a Roth IRA or increasing your 401(k) contributions and said “I should look into that” but haven’t done it yet, your laziness has already cost you money.

WHY AUTOMATION IS THE ANSWER

Think about your daily habits.

Most likely, you brush your teeth every day and don’t even think about. It doesn’t take willpower to brush your teeth. It’s automatic.

Now think about something you’d like to do but are struggling with; perhaps it is to quit smoking, lose weight, or spend less.

These things are difficult to do. They take conscious effort—active self-regulation—to achieve. Meanwhile, the corresponding bad habits (smoking, overeating, spending money) have become automatic.

But talk to somebody who has successfully changed a habit—for example, a daily exerciser—and you’ll hear that  it’s the good habit that is now automatic. Getting out of bed to jog becomes as routine as brushing your teeth.

Your brain has an autopilot!

When your can teach your brain to include a habit on autopilot, maintaining it takes much less effort, if any at all. Better yet, seemingly tiny habits can have big ripple effects.

In the book Willpower: Rediscovering the Greatest Human Strength, the authors explain how even small automatic behaviors can trigger better decisions. For example, have you have ever felt like when you’re well dressed, you work harder? There’s something to that.

Studies show that little habits like shaving, dressing neatly, and keeping an organized home correlate to more self-control in other areas of life. People who exhibit these behaviors are more likely to exercise, eat less, moderate alcohol, even use condoms more often.

So the more good habits you can put on autopilot, the more success you may have regulating other areas of your life.

And when it comes to putting your money on autopilot, your brain has an ally in technology. Twenty years ago, automated personal finances were impossible. Having your paycheck directly deposited was still cutting edge, and paying bills meant cutting a check every single month. Today, it’s not only possible to have an entirely electronic checking account, it’s becoming the norm to do away with paper checks altogether. And these new financial technologies make it possible to put your money entirely on autopilot.

A SIMPLE APPROACH TO PUTTING YOUR MONEY ON AUTOPILOT

As you get older, your finances will get more complicated whether you want them to or not. So the simpler you can keep your financial system, the better. Two primary accounts—one checking and one savings—should suffice unless you own a business or are married with separate finances.

The Three Steps to Automatic Finances

1. Put your savings on autopilot
2. Put your bills on autopilot
3. Put your investments on autopilot

Here’s what somebody’s basic financial autopilot looks like.

Today we’ll cover setting up your savings and bills, next time we’ll talk about investments.

Put your savings on autopilot.

The first step in putting your money on autopilot is to pay yourself first. This means directing a portion of the money you earn into a savings account as soon as you earn it.

• If you’re still working on your emergency fund, put this money towards that.
• If you’re in high-interest consumer debt, put this money in an account that automatically makes extra payments on your debt each month.
• If you’ve funded your emergency fund, then put this money towards your next life savings goal (e.g., a house, a car, a wedding, or a vacation).
• If you’re set on cash, skip this step and focus on investments instead.

There are two ways to pay yourself first:

1. Split your direct deposit between your checking account and savings account (ask your HR manager for the form).
2. Set up an automatic transfer between your checking account and savings account on the day after you are paid. Any online savings account will make this easy.

Put your bills on autopilot.

In part one of this series, I talked about your “nut”, the fixed monthly expenses like rent, insurance, and student loan payments, that you pay every month in the same amount. Once you have a comfortable bank account buffer in place, the next step in putting your money on autopilot is to setup automatic bill payments to each of these bills. There are different ways to do this, and I rank them in order of my preference.

1. Pay with a rewards credit card.
2. Pay with your banks online billpay.
3. Pay through an automatic bank draft (ACH).

Let’s talk about the options:

Credit Cards. Some billers like insurance, cable, and cell phones let you pay with a credit card. As long as they don’t charge a convenience fee to do so, this is your best bet. For one, you can earn your one or two percent of the bill back in rewards and two, you have a third party in between you and the biller. (Remember one of the best things about paying with a credit card—not cash check or debit card—is your right to dispute the payment with the credit card company and not pay a dime until that dispute is resolved).

Online Billpay. The next best option is setting up a recurring payment through your bank’s online billpay service. I like this option because you have control over multiple bills in one place (your bank’s online login). You can stop or change payments to more than one bill instantly in one place.

Autodraft/ACH. Traditionally, if you wanted to pay a recurring bill automatically, you have to sign up with the biller, give them your checking account and routing number, and let them automatically withdraw the bill amount from your checking account each month. This is fine, but there are some concerns:

• Redundant Maintenance. You must maintain your autopay with each biller individually. If you change banks, for example, you have to remember to change the accounts at each biller.
• Less Control. Let’s say you accidentally rack up $3,000 of data roaming charges on your phone while travelling abroad. Since you’re travelling, you forget to check your bill before the autodraft goes through. Your cell provider withdraws the $3k from your checking account and overdraws the account. Not only are you out that money and responsible for overdraft fees, you may lose your ability to negotiate the charges down (after all, the cell company already has your money).
• Returned Payments. If you have your checking account to reject overdrafts, your auto payment will be returned if you don’t have enough money in the bank at the time it’s processed. This may trigger a returned payment fee in addition to late fees from the biller. (Also, be sure to enter your checking account numbers correctly when you enroll at the biller’s Website. You payment will be returned if you make a typo, too.)

Put your investments on autopilot.

Once you have your savings and bills on autopilot, the last (but I would argue most important) step is to set up automatic investing. We will cover this in detail in part four of this series.

RECAP

We humans are emotional, easily tempted, and lazy. We do stupid stuff with money. Therefore, it’s my opinion that the single most important thing you can do for your finances is to put your money on autopilot. Start by transferring a percentage of your income to a savings account as soon as you get paid. Then, setup all of your bills to be paid automatically by their due date either by credit card, bank bill pay, or ACH autodraft. Next time, we’ll talk about the final piece of the puzzle: establishing an automatic investment plan.

ACTION ITEMS

1. Pay yourself first. If you haven’t already, open a separate high-yield savings account and set up an automatic transfer or split direct deposit to correspond with every payday. Do this even if you can only afford to save $20 a paycheck. You can increase the amount later. Having the system in place is what matters.
2. Ensure you have a bank account buffer. Do not proceed to action item three until you have this in place.
3. Put your bills on autopilot. With a bank account buffer in place, put all of your monthly bills on autopay. Set aside an hour to set this up tonight and you’ll easily save an hour a month for the rest of your life.

Join The Discussion: How do you put your money on autopilot? What’s your system? Let us know in a comment.

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Last week, we talked about how budgets are a pain in the ass to maintain and how they can actually hold you back from getting your money in order. I offered a way to minimize budgeting, doing just enough to know your expenses while eliminating the need to worry about how much is left in the coffee budget this month.

Today, we’ll cover an important prerequesite to putting your finances on autopilot:

The bank account buffer.

A bank account buffer is my name for what other people may call a cash cushion, mini emergency fund, or back-up savings. And it’s simply this: some extra cash in your checking account.

When you have a bank account buffer in place, you don’t have to worry that a mistimed latte on your debit card will overdraw your account and trigger a $35 overdraft fee. More importantly, you’re free to start putting bills and investments on autopilot. And as we’ll discuss in the upcoming posts, when things are on autopilot you will worry less, spend less time managing your money, and keep yourself from meddling with your savings and investments.

WHY BUFFERS MATTER: AN ANALOGY

Modern aircraft can basically fly themselves. Although your pilots will likely land the plane by hand, they will definitely punch on the autopilot for much of a long flight across the Atlantic.

Two factors make autopilot safe to use during cruise flight:

• A predictable set of circumstances. The pilots can, for example, set the plane to fly a certain altitude and heading for several hundreds of miles while air traffic controllers help ensure they won’t run into other planes.
• Altitude. At 35,000 feet above the Earth, there is a plenty of time to react if things go wrong.

Planes fly at certain altitudes for many reasons—in part, fuel efficiency—but the higher they go, the more time pilots have to recover and land should things go wrong.

You can think of your money the same way. 

When you’re living paycheck to paycheck, you’re flying close to the ground. One bad bump and you can crash: wracking up overdraft fees or going into debt.

You wouldn’t dare put your money on autopilot in this situation. How can you set your rent to pay automatically on the first of the month if you’re not sure there will be enough in the account each month to cover it?

But imagine if you had an extra $1,000 in your checking account that serves as a buffer between you and an overdraft fee. You don’t spend it, but it’s there to protect you in case your bank debits your rent payment a couple days before you get paid. It’s like an aircraft having an extra 20,000 feet of altitude.

So a bank account buffer is a good thing. But how is different from an emergency fund? And how much do you need?

BANK ACCOUNT BUFFERS VS. EMERGENCY FUNDS

An emergency fund—that separate savings account stuffed with six months expenses or more—is a vital part of financial stability. But it comes later.

A bank account buffer is a starting point. A bank account buffer:

• Protects against minor cash flow fluctuations, like paying rent a few days before your paycheck deposits.
• Is equal to 25% – 50% of one month’s expenses.
• Stays in your checking account.

An emergency fund:

• Protects against big expenses and loss of income.
• Is equal to at least six months of expenses.
• Should be kept in a separate, interest-bearing savings account.

HOW BIG A BUFFER DO YOU NEED?

In the past, I’ve recommended $500-$800 for a bank account buffer. For most people, this is enough. But your bank buffer should be whatever makes you comfortable.

If you have predictable income and expenses and track your spending to the penny, you don’t need much of a buffer. If, however, your expenses or income vary from month to month or you simply don’t want to worry about your bank balance very often, a larger buffer is in order.

Once you know your average monthly expenses, you can build a buffer of between 25% and 50% of your monthly expenses. So if you typically spend $2,500 a month, start with a buffer of $625. If you want more than that, gradually work up to a $1,250.

There is a sweet spot. You don’t want to build your cash cushion too big because that money could be at work for you in some other way. Although interest rates are dreary now, one percent in a high yield savings account is better that zero percent in a checking account. (As an alternative, you can look into interest-bearing checking accounts.)

And yes, you should have a bank buffer even if you’re in credit card debt. But keep the buffer no bigger than necessary. Then, funnel all extra money to paying down your credit card balances.

RECAP

Keeping $500-$1,000 of extra cash in your checking account (a “bank account buffer”) helps protect against overdraft fees and serves as a mini emergency fund when small, unexpected expenses pop up. Building this buffer will enable you to begin putting your money on autopilot, reducing stress and making it easier to reach financial goals.

YOUR ACTION ITEM

If you don’t already have one, build your bank account buffer in the next 30 days.

Putting an end to the paycheck-to-paycheck lifestyle is the best thing you can do for your finances. And it will feel frigging phenomenal.

With some hard work, you can get there 30 days or less. Sell some stuff you don’t use. Cut back on luxuries, if only for a month. If you’re paying extra toward debt or making investment contributions, skip a month; the buffer comes first.

Your Thoughts

If you already have a bank account buffer, how do you structure it? How much of a cash cushion do you keep?

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It’s not because I don’t like pie charts and spreadsheets. (I do.) I don’t like budgets because I hate telling you to write them when I know myself how boring, pointless, and difficult it is.

It’s like the doctor finishing up a physical saying: “You’re healthy. Just lose 20 pounds”. (Happened to me yesterday.) I already knew that, thanks, but dropping a few pounds is easier said then done. Do you know how many freaking books there are on losing weight?

And do you know how many people try to lose weight (AGAIN) every January 1st?

Millions.

Having the right information is useless if you’re not going to do anything with it. And it is doing something that is so hard.

Budgeting is the same.

WHY BUDGETS FAIL

Old-school personal finance books tell you that if you just create a budget and stick to it, then—POOF!—all your money problems will be solved.

But anybody who has ever tried budgeting knows that it’s complete crap.

You know you should budget, but you also know you’re not really going to do it. Learning how to budget isn’t the problem. You can visit any one of hundreds of personal finance blogs to read about budgeting techniques. You can download free spreadsheets here and on countless other sites. You can pick up one of dozens of books. You can use any one of dozens of budgeting apps— many free.

But even if you write down every dollar you spend for 30 days (which, done manually, is a complete pain in the ass), you are still human.

As a human, you are intelligent enough to know that on Jan 1st, you can afford to spend $200 on food and drinks out this month. Unfortunately, as a human, you are quite susceptible to temptation. This means that on Friday, January 20th, after having already spent $190 on going out in the preceding weeks, your willpower will be tested. While you are out with friends, three quarters of a vodka tonic sloshing in your gut, will you:

• A. Say: “I have to go home, this drink puts me overbudget?”
• B. Order one—maybe two more drinks—and then do dinner? After all, it’s Friday, you’ve worked hard, you deserve it, budget be damned.
• C. Completely forget you had set a $200 budget in the first place, and have no idea you’ve already spent $190 on going out.

Over the past five plus years, I’ve experimented a lot with budgets. I’ve set monthly budgets, annual budgets, and weekly budgets. I’ve tracked my spending using paper and pencil, spreadsheets, and apps like Mint.com. And I’ve learned two things:

Tracking spending manually is pointless. I never keep up. And I’m a financial blogger…a total nerd about this stuff. If I can’t do it, I don’t expect you to.

Monthly budgets are fairly useless because we underestimate our monthly expenses. Think about it. Although there are some things you pay for every month: housing, transportation, utilities, food, and debt payments, there are lots of things you pay for less than every month: car repairs, home improvements, trips and vacations, holiday presents, and insurance payments, to name a few.

For some people, these less predictable expenses may only be 10% or so of your total spending, but for me, especially after becoming a homeowner, they’ve crept up to more like 30% (home repairs aren’t cheap).

What this means, of course, is that if I take my annual take-home pay, divide it by 12, and proceed to spend that amount every month, I’m going to be in trouble when that unexpected car repair comes up, or it’s December and I have to do my holiday shopping.

We need to fix the following problems:

• Our human tendency to cave in the face of temptation.
• The futility of tracking every dollar ourselves.
• The difficulty of getting an accurate sum of monthly expenses.

How do we do it? And how do we make it simple?

For one, we stop budgeting.

THE ANTI-BUDGET

I’ve been outlining this post for a week or so. Then, yesterday, a funny thing happened. I was in the doctor’s office waiting for my physical and I picked up the Nov. 2011 issue of Money Magazine and randomly turned to a page that actually recommended the same thing: stop budgeting!

As a way to reduce financial stress, the piece recommended to ease off budgeting, saying:

“Money (or its lack) is the nation’s most common source of stress, reports the American Psychological Association. Making a detailed budget — a widely advised fix — only makes things worse, says Cleveland financial planner Kenneth Robinson, based on a decade of work with clients; the problem is that people hate to think about where they’ll need to cut back.”

In other words, when money is tight, focusing on that shitty fact day in and day out doesn’t do us much good.

Money’s fix for the problem is the same as mine:

• Put your money on autopilot.
• After the big things are take care of, you’ll only need to track “what’s left to spend”…on whatever you want.

This idea isn’t new.

THE IMPORTANCE OF AUTOMATION

I first read about automatic finances over 10 years ago in The Automatic Millionaire by David Bach. The entire book is devoted to setting up automated systems to manage and invest your money. This does two glorious things:

• It eliminates worry. You stop wasting time thinking about stupid things like “did I pay the electric bill this month?”
• It protects you from yourself. Automated finances make it harder for you to sabotage your money. No more late credit card payments and the associated fees and damage to your credit score. No more skipped IRA contributions. And on and on.

Another writer who has taken the idea of automated finances to the next level is behavioral finance guru Ramit Sethi. He lays out simple plans for automating your personal finances on both his blog, I Will Teach You To Be Rich, and in his book by the same name. He’s a vocal advocate of what so many other financial “experts” for some reason refuse to acknowledge: Our generation does not want people our parents’ age telling us to just “set up a budget” and “cut back on lattes”…the latter a direct jab at Bach, who trademarked the term “Latte Factor” to describe how daily coffee habit can eat into long-term wealth.

A few years ago when I wrote about automated finances, Ramit made a kerfuffle because he felt the post was too similar to his own material. To be collegial, I took that post down—obviously, I never want to hear the faintest whisper that I’m trying to rip off another blogger’s material; I’m not. I’m a student of Sethi’s methods myself; he’s a brilliant psychologist, blogger, and marketer. In this case, one of his favorite concepts—automated finances—is too important not to address on a blog that aims to provide a complete resource for your finances.

So check out Bach’s book, Sethi’s blog and book, or what I’m going to cover in the next few days. But when you finish reading, my only hope is that you’ll actually do what it takes to put your finances on autopilot.

Your wallet will be better off.

AUTOPILOT SPEND TRACKING

Forget about manually tracking every beer and burger. The goal is to set up a system that keeps track of all of your spending electronically without any additional work from you so that you can access it if an when you need to.

The Single Card Method

One of the best ways technology can help our wallets, I think, is by eliminating the need to use cash, and therefore, eliminating the need to keep track of our cash expenses.

Now this is counterintuitive to what a lot of old-school financial gurus say:

• “Cash is king!”
• “You spend less with cash!”
• “You can’t overspend with cash! When it’s gone it’s gone.”

That’s all true, but the fact is cash also can get lost and stolen. And, more importantly, cash is on the way out. Electronic payments are here, like it or not, and the times you need cash (for anything) over a debit or credit card are fewer and fewer.

But the best thing, in my opinion, about using a credit or debit card, is that you automatically have a record of all of your spending. You don’t have to do a damned thing.

Credit vs. debit

Credit cards are slightly better than debit cards because most give you ways to sort and even tag your transactions, although some banks are starting to offer this for debit cards, too. With most cards, you can also export your transactions to spreadsheet…which, for the nerds like me, is where the fun begins.

Using Personal Finance Managers

As an alternative to the Single Card Method, there’s Mint.com* or similar personal finance management (PFM) tools. These applications link to your credit and debit cards, aggregate your transactions, and can even categorize them automatically. You set spending limits, and they can send an email or text when you hit them. *Full disclosure, Mint is an affiliate of Money Under 30.

These apps are powerful and effective…if, of course, you remember to login occasionally and make sure the categories are right and view your tallies. But even if you don’t, that’s OK. The important thing is that data is there if you need it (for example, you want to know if you can afford to move to a bigger apartment and need to analyze your past spending).

YOUR MONTHLY NUT

Setting up Mint or downloading all of your credit card transactions is great for historical analysis of where all of your money goes. Looking forward, however, this data is less important. What you need to know are your fixed monthly expenses. Things like:

• Your rent or mortgage
• Utilities and insurance
• Loan payments (student, auto, etc.)
• Minimum credit card payments
• Desired savings, investments, or additional debt payments*

That last one is important. It’s vital that you calculate how much you want to save, invest, or use to pay down debt first. (What we usually do is look at how much we want to spend, and then take whatever’s left and save it. Problem is, there’s not usually much left.) To find what’s left:

• Total your fixed monthly expenses (your Nut).
• Figure out your net (take-home) pay, per month.
• Subtract your Nut from your take-home pay.

This is what’s left to spend. On whatever. Food, gas, beer, travel. Of course, if something big happens, you may need to spend money on that and have less for fun stuff. That sucks, but it’s also why you should have a buffer, which we’ll talk about in another post very soon.

Download my simple “Anti-Budget” Worksheet here.

If There’s Nothing Left…

“But wait!”, you say. “After my nut, I don’t have anything left!”

OK. Deep breath.

If money is tight, it’s likely there won’t be much (or any) left to spend after you’ve laid out your necessary monthly expenses and what you hope to save.

In the short-term, you can reduce–but not eliminate–your savings goals while at the same time trimming spending. Do what you must to get these in check so you’re not going into debt.

At the same time, this is time to look at making the kinds of big changes that can impact your overall financial picture. Forget about trying to trim your food budget by $25. Look at big places you can save. Can you get a roommate? Can you refinance your mortgage? Or, can you earn more money?

Cutting little things gets a little bit of money. Making big changes gets you a lot of money.

YOUR SPENDING ALLOWANCE

The amount of money that you have left after your Nut (fixed monthly expenses and savings) is what I call your Spending Allowance. It’s how much you can spend this month without worrying. On whatever you want.

Using whatever method you’ve setup for Autopilot Spend Tracking, you can keep a simple eye on how much your Spending Allowance you’ve used month-do-date. For example, by setting up a goal in Mint or by using the Single Card Method for all of your day-to-day spending. (This is what I do. If my family’s Spending Allowance is $2,500 in a month, I can eye our credit card balance throughout the month. If it reaches $2,000 too far before the end of the month, for example, I know it’s time to ramp down the spending a bit.)

You can use the Anti-Budget Worksheet to figure your Spending Allowance. Get it here. 

RECAP

This is a lot to digest. But here’s what’s important:

• Budgets are overrated. They create stress and we don’t stick with them.
• All you need is a Spending Allowance. Instead of tracking dozens of categories of spending, know how much you can spend per month—your Spending Allowance—after you’ve covered big expenses and savings.
• Forget manual spend tracking. Keep an eye on how much of your Spending Allowance you’ve spent with Mint or by simply using one credit card for everything you buy. Cash is dead.

YOUR ACTION ITEMS

Read all you want, but this information won’t help you unless you put it to work in your life. This week:

• Determine your Nut and Spending Allowance using this worksheet.
• Decide how you will track your spending going forward, with a service like Mint or using the Single Card Method.
• Leave a comment letting me know:

1. What you hate about budgeting. Be specific.
2. Your biggest worry or stress about managing your money day to day.

I’ll try to answer your questions in the upcoming series. In a couple days we’ll talk in detail about building your Bank Account Buffer. This is tiny emergency fund of $500-$1,000 that can cushion you from unexpected expenses like car repairs so when they happen they don’t eat up your entire Spending Allowance for the month. Then we’ll move on to discuss ways to put your bills and savings on autopilot.

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I don’t.

Does that surprise you?

After all, I publish a financial blog. Shouldn’t I join the chorus of financial pundits singing: “Thou must create a budget and track your spending to the penny! Thou must create a budget and track your spending to the penny!”

I mean, I could. But here’s the problem: If you’re like me, you’re not going to do it!

(At least the tracking part.)

You might start out strong and track all of your spending this week. You might even finish your budget for the month. But next month—or the month after that—life will get in the way. Perhaps you’ll withdraw $60 from an ATM on Saturday night, forgetting to write down how much went for the cab, how much for drinks, and how much is left in the pocket of your jeans.

You’re not lazy. You’re just human. And you’ve got better things to do than manually write down your purchases all the time.

I know this because I gave up trying to track my spending to the penny years ago after many failed attempts.

That’s not to say, however, I don’t have budget.

I do. It’s just a casual budget.

Because I’ve found that the simpler you keep budgeting, the more likely you are to do it.

Here, I’ll share with you:

• How I’ve boiled budgeting down to TWO EASY STEPS that don’t take much time.
• How you can control your budget without recording every penny spent.
• How you’ll be able to manage your budget when it’s convenient for you, not every month or every week.

SETTING UP A SPENDING PLAN

My wife Lauren and I have a simple spreadsheet similar to my free budgeting spreadsheets that lists our monthly after-tax income, our recurring monthly expenses like the mortgage and utilities, desired monthly savings, and estimated amounts for everything else like food, entertainment, and household expenses. Because we’ve got our finances in check, all our estimated expenses come in way below what we earn, so if we want to spend a few extra hundred dollars here or there, we don’t have to sweat it.

Now, we’re fortunate to be in this comfort zone today—but believe me it hasn’t always been this way. I used to have to watch my bottom line far more closely. Still, no matter how I tried to track my monthly spending, my budget was never perfect.

What I’ve learned is that I’d rather have a rough budget with a big cushion for unknowns than budget to the penny but leave no room for the unexpected.

EXAMPLES OF ROUGH BUDGETS

Consider the following big picture budgets.

The first example shows a healthy budget. After taxes, the person is saving 25% and after big expenses like housing and transportation, has plenty to spend on whatever he or she pleases.

In the second example, debt payments on credit cards or student loans leaves little left over to spend on anything else. This kind of budget creates the kind of debt death spiral I sketched in Kick Debt’s Ass. You have to pay so much each month to creditors, you don’t have any money left over, so you have to use credit to buy stuff you need.

*If your budget looks like this, you need to dramatically reduce your big expenses (like housing and transportation), earn more money, or simultaneously restructure your debt AND stop using credit.

Budget shortcut #1: Sketch your own “big picture” budget to know how much “play money” you have left over every month.

(I call it “play” money, but it may still cover necessities like food, it’s just money that isn’t earmarked for a fixed monthly bill—in other words, what you have left to spend).

Once you know that figure, reduce it my 20 percent or so to account for expenses that may come up less than once a month like car maintenance, insurance premiums, and certain taxes. (It’s easy to forget about or at least underestimate these.)

SIMPLIFYING EXPENSE TRACKING

Of course, making a spending plan is only half of budget. You need to know whether your actual spending is within or exceeding your plan.

You already know that I’m not a fan of manually tracking expenses to the penny.

So what’s the answer?

Simple budgeting step #2: Estimate or automate expense tracking, and occasionally ensure you’re on track.

If you pay for things mostly with cash, you’ll just have to estimate. Use your bank statements to add up how much cash you withdrew each month—right there you should know whether or not you exceed the “play money” in your budget.

If you pay for most things with a credit or debit card, you can use a free budget tracking tool like Mint.com or simply use your card statements to get an accurate account of your spending. I simply import (or cut/paste) transactions into excel and add a column to categories purchases however I want, like so:

Then I can run a pivot table to quickly show me how much I spent in each category:

Technical Note: To create a pivot table like the one shown below in Excel 2007 or 2010, highlight the columns of data, click Insert -> PivotTable -> PivotTable and OK. Then, in the PivotTable Field List, drag “Category” to RowLabels and “Sum of Amount” to Values.

OTHER BUDGET SHORTCUTS

Obviously, taking shortcuts in your methods can result in compromised results.

On one hand, some rough, occasional budgeting is better than no budgeting at all. On the other, your estimates may be wrong. One solution: the more transactions you track automatically with a free budgeting tool, the smaller your room for error.

With that disclaimer, I can’t imagine budgeting any other way, and I can’t imagining recommending YOU budget any other way, because I KNOW how impossible it is to keep up with a detailed manual budget. So give these shortcuts a try, and let me know how it works out for you.

What budgeting shortcuts do you use to plan and track your spending in as little time possible? Let everyone know in a comment.

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Not too long ago, I compared budgeting to dieting. Want to lose weight? Count the calories you eat. Want to save more money? Count the pennies you spend.

Of course, just like counting calories, tracking your spending manually is—to put it nicely—tedious. Thankfully, however, technology is all changing that.

Although I admit, I’m an Excel nerd who still favors spreadsheets for tracking my net worth and planning my upcoming months’ budgets, there’s a feature of online budgeting tool Mint that I can’t live without—it’s called Trends. In fact, I’m such a fan of trends that I wrote about the feature back when it was a part of Quicken Online. Since then, Intuit bought Mint and the two programs merged…my beloved Trends included.

If you’ve never used Mint before, it’s a must-try way of securely viewing all of your financial accounts in one place…online. And I only say “must-try” because Mint is totally free. So if you hate Mint, you can delete your account and be no worse off. (Before you ask, yes, Mint is an affiliate but no, I’m not getting anything special to write about trends…I truly do think it will help you track your spending). And let me tell you why…

If you do almost all of your spending with either a credit or debit card, and you link those accounts to Mint, Trends is: a) automatic and b.) bullshit-proof.

• Trends is automatic. Log into Mint any time of day or night and get a picture of your recent spending. There’s no need to crunch numbers or fiddle with spreadsheets for several hours every month to see how you did last month. Trends tallies your spending and it’s done.

• Trends doesn’t bullshit. What I mean is that if you were to manually track your spending, what are the chances you might forget a coffee here or a newspaper there? Or perhaps choose “not to count” that $63.50 (including ATM fee) you withdrew at midnight last Saturday night? I know I’ve done it. Thing is, we’re human. And unless we subject our monthly budgets to Price Waterhouse Cooper auditors, we’re probably not going to get an accurate snapshot of our spending unless we enlist technology like Trends.

Although I think that these are the two most important ways Mint Trends distinguishes itself from tracking your pennies with a pencil and calculator, they are far from the most novel. What makes Trends, dare I say, fun to use are all the ways you can slice and dice your financial data visually. For example, you can:

• View 16 different trends (like net worth, spending, debt, etc.).
• Select the timeframe to view (e.g., month, quarter, or all time).
• Compare your spending to averages in your region.
• Switch between bar and pie charts.
• If you must, export your data to other applications.

Trends takes the monotony out of tracking every penny you spend, but that also means you may spend five minutes looking at colorful charts where you once spent an hour pouring over dollar signs. The result? Less connection to your spending. That’s the danger of convenient technology. So although Mint is definitely a good tool to have in your budgeting workbench, don’t let Mint be where your budgeting stops.

New to Mint? Sign up for free and link your first bank account now »

What do you think? Has Mint’s Trends feature helped you budget or reach other financial goals? Leave a comment—or if you have a really specific example, please contact me as I may want to write another post about it. Also, have you combined manual budgeting methods with technology like Mint? Why? And what are your methods?

Today, I want to know:

How do you budget for, plan for, and execute your holiday purchases?

When you comment, you’ll enter to win one of four prizes:

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Thanks to PerkStreet

Once again, these prizes are made possible by PerkStreet, the cash rewards debit card.

You probably won’t be surprised to know that anti-debt guru Dave Ramsey is a big endorser of PerkStreet (hence the Ramsey prizes). After all, PerkStreet gives you the opportunity to earn generous cash rewards on your purchases without a credit card. Here’s how the rewards work:

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Holiday 5% Cash Back Bonus

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Learn more about PerkStreet or apply for a card

PerkStreet is a great way to budget for holiday spending (especially with the 5% promotion), but we’re interested to know how you’ve done it in the past. Don’t forget to respond for a chance to win one of the four prizes.

The fine print: The contest will be open until Wednesday, October 27 at 12:00AM EST. To enter, please leave a comment about how you budget for holiday spending. Limit one entry per reader. Winners will be randomly selected and notified by email, so a valid email address is required to win. Don’t worry; we won’t use it for anything else. All prizes are being furnished by PerkStreet. Other than these prizes, this site did not receive anything from PerkStreet for this post or to run this contest, however we may earn a referral fee if somebody we refer to PerkStreet opens an account. If you have any questions about this contest, please contact us. Good luck!

Here are three simple things that you should do for your finances before year end.

1. Make a financial plan for the upcoming year.

There is no time like the present. Never put off tomorrow what you can do today. I am sure that you have heard all of these clichés before. These sayings may be old but they are true. Now is the time to formulate your financial plan for next year.

Although most of us tend to think about budgeting as a weekly or monthly exercise, you can benefit from making an annual spending plan, too. After all, some expenses (like those holiday gifts) only come around once a year.

Here’s how to do it:

Make a list of your monthly income and expenses from the current year. Be sure to include every expense including the small ones like entertainment. You can then make a projection for next year’s budget from the current year’s expenses. Look for areas where you can trim excess expenditures to increase your bottom line. The total amount of money left over can be used to pay down debt or to start investing.

While you’re at it, craft a plan to reduce your debt in 2011. Find one or two credit card bills or student loans that you can totally pay off before the year is over. You want to finish each year in better financial shape than the previous one.

Feeling ambitious? Take the time to make a five-year financial plan.

2. Review your investment portfolio.

Smart investors buy and hold, but they don’t just “set and forget”. Periodically, you should re-balance your portfolio. The end of the year is a perfect time.

Review your investment strategy over the past couple of years and see how it worked for you. Were you too aggressive or too conservative in your investing? Did your portfolio outperform the market as a whole? You may think that you are a master investor, but if your performance lagged the market, then you may need to look at picking up an index fund.

Check over your portfolio and rebalance if necessary. Make sure that your asset allocation plan is still in line with your goals. You may find that your portfolio mix has shifted dramatically during the year. It only takes a few minutes to get your portfolio back into balance. You should also update your contact information and beneficiaries. Save yourself the headache of making these changes in the New Year.

3. Increase your contribution amount.

Did you know that your investment contribution amount should never stay the same? If you are contributing the same amount to your retirement plan as in 2009, then something is wrong. Every year that passes you should increase the amount of money that you contribute to your 401(k) or IRA. Your company may have provided you with a raise over the past 10 months or an end of the year bonus. A portion of this money should be applied to your retirement portfolio.

At a minimum, try to increase your contribution 1% every year. Although you shouldn’t miss 1% every time you add it, over time those small increases become 5% and 10%, which means a big long-term boost to your investments.

Don’t have a retirement plan? Open one! Learn why you need a Roth IRA.

Well that’s your hit list for the end of the year. I hope that this helps you in your wealth building goals! If you start tackling some of these now, you’ll have a few less To-Dos on your list when the New Year rolls around.

I was 19.

I could tell you that I wanted everything to be perfect, but honestly, I just wanted it to work. I knew what I had to do, but I had no idea how to do it.

I’m talking, of course, about my first budget.

When I finally sat down at my dorm room desk to scrutinize my spending, I was already in debt. And little did I know, I would stay in debt for the better part of ten years. Clearly, I shouldn’t have waited so long.

You see, when I arrived in college, I had a few thousand dollars in my bank account from a summer job. After I purchased textbooks and a few dorm decorations, I had maybe $1,500 left. And within a month or two, I had spent it on pizza and bus tickets to see my girlfriend. I was smart enough to realize that I was spending money I didn’t have, but I wasn’t disciplined enough to stop. I wrote a budget, but month after month, I blew it out of the water. Soon, my first credit card maxed out, and I was on to cards two and three.

Why my budget—like most—was failing.

I think budgets often fail for two reasons:

• They lack an accurate record of past spending.
• They lack well-defined goals that are attainable.

When you think about it, a budget is nothing more than a spending goal. When you write a budget, you’re telling yourself, “I will not spend more than X dollars on this type of thing within this time frame.” And that, my friends, is a goal. No different than a goal you might set when you’re trying to lose weight or set a personal best 5k time. And if you’ve ever had experience setting goals, you’ll know that goals need to meet certain criteria to be effective. I like the SMART mnemonic. Goals need to be:

• Specific: “I will only spend $200 on going out this month and put $200 extra into savings” instead of “I’ll spend less than I bring in this month.”
• Measurable: Budgeting doesn’t work if you can’t measure what you earn and what you spend. Period.
• Attainable: If you pay $600 in rent and $200 in utilities, it’s going to be awfully hard to keep your total monthly spending under $1,000.
• Relevant: Why are you budgeting? Is it to get out of debt faster? Meet a specific saving goal? Test your willpower? Be clear about why you want to budget up front.
• Time-bound: Basically, you need a deadline. For most of us, it’s the end of the month. But setting daily and weekly budgeting goals may be more effective.

Again, I think most budgets fail because they aren’t attainable and they aren’t measurable (or, more precisely, we fail to measure accurately). Now, I’m going to talk about why this is, how we can do better, and Mint, the popular and free monthly budgeting tool, can help.

Full disclosure: Mint’s parent company, Intuit, is an affiliate advertiser on this site. I like Mint—and am happy to recommend it, after all, it’s free—but it’s certainly not the only budgeting tool out there. Here’s a list of other monthly budget tools for comparison.

Your budget needs well-defined and attainable goals.

Certain nerds aside (many of whom—ahem—may also be financial bloggers), most of us don’t budget because we enjoy numbers and spreadsheets. We budget because we want to achieve a financial milestone. For example:

• We want to stop spending more than we earn and, inevitably, going into debt.
• We want to pay down existing debt faster.
• We want to find extra money every month to save for a home, emergencies, or retirement.

Although these are all worthy goals, they are not specific enough to motivate a really good budget. An example of a specific goal would be: “I need to find an additional $200 a month to pay off my credit card debt by the end of the year. I know I spend too much on going out with friends and clothes shopping, so I’m only going to spend $150 a month on each.” When your goal is specific, you’ll know exactly where you need to watch your wallet and what you’re going to do with the savings. As you see your progress toward your big-picture goal, it will motivate you to stick to your budget on a daily basis.

Finally, I’m a proponent of focusing on one thing at a time. Although a good budget lets you see the whole picture of your monthly spending, setting out to curb your spending in every category at once is risky. Instead, take baby steps. One thing at a time. If you spend too much on going out, try to spend less on going out for a week or two. Then, add a shopping goal. Etc.

Your budget needs an accurate record of past spending.

You can’t manage what you don’t measure.

If you don’t know how much you spent on eating out last month, how do you expect to spend less on it this month? Budgeting begins with figuring out how much money you’ll have for a month, and what you want to do with it. But that’s the easy part. Anybody who got through fifth-grade math can sit down with a pay stub and divide it up. The hard part is tracking where that paycheck actually goes.

This is why the envelope method of budgeting is unquestionably the best. (With an envelope budget, you take the cash you have to spend for a week or month and divide it into envelopes for different things like rent, gas, groceries, etc. When you spend the money in each envelope, you can’t spend any more on that category). For somebody who has had difficulty with other budgets in the past, I’d still recommend trying an all-envelope system. Unfortunately, many people simply don’t use cash anymore, and it can be inconvenient.

Tracking and categorizing transactions in Mint:

Although credit cards and debit cards make tracking your overall spending easy (you get a statement each month with a tidy list of all your purchases), you still need to sit there and categorize the purchases. It’s tedious. It’s time consuming. And unless you’re one of those spreadsheet nerds, you’re probably not going to do it. Hey, no judging. That’s where budgeting tools like Mint come in. Mint—and others like it—can aggregate and categorize transactions from all of your bank accounts and credit cards. The categorization still takes some manual effort, but Mint learns from you. As soon as you tell it that $1.98 purchases from your corner convenience store are for coffee, Mint will correctly assign these future transactions. And Mint doesn’t lie. When we track our own spending, we may “fudge” a bit. We may not include the $100 in cash we took out of the ATM one Saturday night and blew mostly on cover charges and tequila shots. With a budgeting tool, that cash needs to be accounted for.

Predefined goals in Mint:

Budgeting tools like Mint make measuring your spending easier, which makes budgeting easier. When Mint’s categorization is working well, you can set text or e-mail alerts to notify you if you exceed spending in a certain category. (I recommend setting the alerts about 25% under your monthly goal amounts, because credit card transactions can take a couple days to post). Finally, Mint’s new goals feature allows you to set long term goals and see your progress. When you choose from predefined goals (like buying a car or getting out of debt), Mint guides you through some questions like when you want to reach your goal, what existing assets you want to use towards your goal. Then Mint shows you how much you’ll need monthly to reach your goal so you can tweak your budget accordingly.

To learn more about Mint, read my brief overview or open an account…it’s secure and free.

In conclusion…

Budgeting is a bit like counting calories. Figuring out your goal consumption (or spending) is easy. Diligently tracking every calorie eaten or dollar spent, not so much. Budgeting tools like Mint eliminate the pain of tracking every penny and can help you set attainable goals, increasing the chances your budget will succeed. I just wish I had that kind of help 10 years ago.

What about you? What have you found to be the biggest obstacles to sticking to your budget? How’d you overcome them?

We all want to budget better.

That’s why a monthly budget is a crucial part of any financial plan. Budgeting the old fashioned way––with a stack of receipts and a calculator, was a time-consuming bore. But today, dozens of powerful budgeting software programs, spreadsheets, and templates obliterate any excuse for spending without a budget. Some cost just a few dollars a month, others are 100% free. Check them out:

Free Budgeting Software

• Mint. Mint.com is a free Web and mobile budgeting tool. Users can securely link bank accounts and credit cards to Mint, create budgets, and set alerts for when balances are low or spending exceeds set amounts in a certain category. More about Mint. Free.

• MoneyStrands.A Web budgeting tool that links to bank accounts and credit cards and accepts manually or bulk-uploaded transactions from bank accounts. Free.

• Rainy Day Budget. A free, online, manual budget tool. Free.

• GnuCash. Free financial software for Windows, Mac, and Linux. Handles small business accounting, too. Free.

• Yodlee MoneyCenter. Free online money management tool that aggregates bank accounts. Free.

Paid Budgeting Software

• You Need a Budget. Personal finance management tool for Windows, Mac, and Linux based on a proprietary four-step budgeting methodology. Free trial, then $59.95.

• Mvelopes. Web and mobile budgeting software program that mimics the physical envelopes-based budgeting system in which you put your cash into envelopes for things like groceries, gas, utilities, etc. $8-$14 monthly.

• PearBudget. “Really simple budgeting”. Free trial, then $3 a month.

• Quicken. A full-featured personal finance management software application for Windows and Mac. $59.99.

• PocketSmith. A Web-based calendar/budget that forecasts your future cash flow. Three plans available: Free, $5 or $12 a month.

Free Budget Spreadsheets

• J. Money’s Financial Snapshot and Budget. Budget spreadsheet combined with net worth (debt and bank account balance summary). Free.

• Four-step Budget Template. A very simple, free spreadsheet from the blog Life After College. Free.

• MoneyShrugged Budget. Broken into categories based on major spending areas (housing, transportation, insurance, etc.) Free.

• Enemy of Debt’s Deluxe Budget. Includes a budget, spending worksheet, check ledger, and more. Free.

• Fiscal Fizzle’s Monthly Report Template. A complete spreadsheet for household financial planning. Free.

• Free Monthly Budget Spreadsheet. Written by yours truly, this spreadsheet helps you manually track not only what you want to spend in the month, but what you spent by day. Free.

Paid Budget Spreadsheets

• Simple Planning Excel Budget Planner A powerful Excel-based budget planner. The site also offers a variety of other Excel-based financial tools Free trial, then $15.95.

• George’s Budget. A budgeting spreadsheet. $19.95.

Other Cool Tools

The following tools aren’t strictly budget tools, but they are related to smart money management.

• Debt Free Adventure’s How Much Your Debt Costs You. A spreadsheet to help you figure out how much your debt costs in interest each month. Free.

• DebtGoal. An online debt reduction planning application. Like the “Weight Watchers of getting out of debt”. Free trial, then $14.95 a month.

• Shoeboxed. A receipt scanning and organization service. Mail in your receipts in prepaid envelopes and they do the rest. Monthly subscription.

Do you use any of these to write your monthly budget? Or something else? How has it worked for you?

Assuming tuition, books, meal plans, and accommodations are taken care of, you should set a reasonable amount of spending money per week for incidentals. You should also set aside a few dollars for “back to school” purchases. You know, some new clothes and random dorm accouterments.

After school necessities, you need figure out how long you have to make the summer cash last as weekly spending money. This is easy math: take the amount of weeks you need to survive and divide it by the amount you have in the bank. Chances are your budget will be set right there.

If you have a work-study job, or a part time job to make it through the school year this does not mean you should increase your weekly spending amount: It is never too early to start an emergency fund. If you find yourself in the unique position of having more than you thought for spending money, please put some away in a savings account!

Now, set aside funds for the second semester and don’t touch them until you come home for winter vacation. Going back to school in January knowing that you don’t have to get a part time job is a Christmas present all by itself!

Speaking of holiday presents, if you’re fortunate enough to get cash gifts over the holidays, don’t think of this as extra. If you can help yourself, stick to your budget of weekly spending money and try to put any cash gifts in savings. When you have an unexpected car repair or want to head to spring break with your friends you will be glad you have some money tucked away!

Being a student and trying to budget is incredibly difficult. But, if you learn to budget at the beginning of college, you’ll be so much better off in the long run.

Budgeting is no fun, but having no money is even less fun. Classes and tests and preparing for the future are enough to worry about without having to stress over having no money. If you can create a budget before the school year starts with money from your summer job, the upcoming school year will be a more enjoyable and less stressful experience.