Pop quiz: Do you know how much you spent on eating out last month—to the penny?
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!
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.