Have you ever tried to count calories? Apps like MyFitnessPal make it easier, but it’s still such a tedious activity that few people keep it up for more than a few days.
The same could be said about budgeting.
When I was 19, I first 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).
I’m going to talk about why this is, how we can do better, and how a simple budget app might be able to help.
Your budget needs well-defined, 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 about as good as budgeting gets. (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.
An app will track and categorize your spending for you
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 come in.
Budgeting apps can aggregate and categorize transactions from all of your bank accounts and credit cards. The categorization still takes some manual effort, but an app learns from you. As soon as you tell it that your $1.98 purchases from the corner convenience store are for coffee, a good budgeting app will correctly assign these future transactions.
When we track our own spending, we have a tendency to “fudge” a bit, but an app doesn’t let you lie. 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, but budgeting tools hold us accountable for that cash.
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 apps like these 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.