Most people hate even the word Budget and to be honest, with the way it has been taught and even the way Governments continually seem to fail in meeting their budgets, its not really that surprising. However, while it is possible for governments to ignore the impact of failing in their obligations and simply increasing the debt ceiling as the US government is doing, that same way of dealing with debt is not an option for the common man.
Budgeting does not have to be an onerous task, and while it is possible to literally become a millionaire by saving £5/day – as long as you start early and keep it up – by the time people generally consider budgeting their finances are generally not as comfortable as they would like. It is important to remember however that while part of any good budget is determining where you can make cuts in your spending to increase your saving, a budget does not mean doing without things that you need or otherwise limiting your freedom. In fact one of the things you will learn as you build your budget is the difference between NEED and WANT.
Starting Your Budget
Budgeting is significantly easier if you have the right tools and while you could do it with paper and pencil, it really makes more sense to use the tools that are now available – both the free ones and the paid ones. Some common budgeting tools are as follows:
- Excel and other spreadsheet programs - While you need to pay for Excel, most people have access to this on their computer. For those that do not however you can utilize some online spreadsheet applications – Zoho Docs and Google Docs are both very easy to use and are free but require that you have an Internet connection to use properly. A free office suite that can be downloaded also is called Open Office – not only will you get a spreadsheet program, but also a document creation program and other common office type applications. If you do chose to go this route, do a search online for some simple budget worksheets – Microsoft have some good ones available for free!
- Free Online Budget Applications - MINT is the most popular online money tracking application and while it is not truly a budgeting tool, it does have some of the features of budget applications and is worth taking a look at.
- Desktop Based Applications - There are quite a few people who do not feel comfortable having all of their financial information online and on another companies site, and while MINT has bank-level security in place, and is literally an information portal only you might want to consider desktop based software if this is applicable to you. YNAB (You Need A Budget) and Quicken are both extremely popular options and while Quicken is by far the most popular, its budgeting features are not as robust as YNAB. YNAB is built on the tried and tested envelope system of budgeting and is one of the better options if you do not currently have a budget in place. While you would need to pay for either or both of these tools, YNAB especially is well worth the investment.
Recording Your Data
Regardless of the solution you chose, the most important step in handling any budget is tracking your income and expenses – not just once, but regularly. A lot of common, recurring and expected expenses can be automated in quite a few of the applications to save you time, but you should try to give yourself a 1/2 hour a day (at least) in the early stages to stay on top of your purchases, and as you gain experience in the use of your selected tool, you will gradually be able to decrease this time.
I do acknowledge that this is tedious and boring, but unfortunately at least for the first month or two it is not only necessary but essential as without knowing where you are spending your money, you will not know where you can make your cuts and savings.
Categorizing Your Expenses
Most of the tools that I have mentioned already have default categories built into them and these categories are quite useful as a starting point as in 90% of the cases, one (or more) of them will apply to your needs.
As you continue to work with your budget you will better determine which categories are appropriate and again with some of the tools, you can automate the process so that when you make an entry that you have made previously the category will be filled in for you automatically also, saving you even more time.
In the early stages especially it is easier if you do not get too detailed with your budget, for example Dining will suffice instead of splitting into two different categories of Drinks and Restaurants.
Categorizing Your Income
As important as it is to track your expenses, it is just as important to track your income. Your budget lives based on the funds that are coming in and unless you want to track how much you are paying in taxes (which might be extremely useful if you are contractor) it is probably easiest just to track your Net Income as that is the money you will have available to spend and fund your budget.
Again this is something that can be automated as in most instances your income will be regular and paid to you either bi-weekly or monthly. If this does not apply in your instance there are ways of estimating this amount and you should put your estimate into your budget.
Using Your Budget
Now that you have filled in the basics, it is up to you to ensure that you stay on top of it and enter any other regular expenses that you might have either forgotten or that you have made that are not regular. Try to determine which of your expenses are fixed and which are variable and in each of these area’s which are NEEDS and which are WANTS.
Once you know which of your budget items are WANTS in both categories, those are the areas where you can make cuts to provide you with more funds.
Some NEEDS that you need (no pun intended) to keep in mind are really the simple essentials of life – heat, water, electricity, rent or mortgage and food. Some of the WANTS that you want to consider looking at further are things like Entertainment, Eating out, Dining Out etc…
With an envelope budgeting system, your income is distributed amongst the various envelopes (categories) that you have available and as you will see, as you distribute these funds, your funds remaining will gradually disappear. In YNAB its called giving every dollar a job – and by following this envelope based system, you will be able to ensure that you never exceed your budget. If in the course of the month you do exceed your budget in any one given category you would need to reallocate funds from other envelopes to pick up the slack and correspondingly decrease your spending.
Gradually as time goes on, you will find that not only does using a budget get easier, but by prioritizing your spending correctly you can better target your debts and increase your savings.
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Love the layout. Interesting post, thanks for the great read and keep up the good work. There is a ton of useful information on here. Pay attention people this is solid gold here.
Thanks again,
Ricky
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Hi Ricky – thanks for reading and commenting! Appreciate your kudo’s
John Henry recently posted..DEALING WITH A PERSONAL FINANCIAL CRISIS
This is a great article because it highlights a principle that most people overlook. Building a budget! Most people jump head first into opportunities and make no plans whatsoever of how they are going to pay for services. Budgets apply to ventures and everyday life and it’s articles like this that need to be introduced to a lot of people in this world that fail to see the importance of this concept.
Thanks,
Ryan
Ryan Eisenhower recently posted..Selling At A Flea Market
Hi Ryan – thanks for reading and commenting. I agree, budgeting should be the first step as only when you plan can you deal with unexpected occurrences.
John Henry recently posted..DEALING WITH A PERSONAL FINANCIAL CRISIS
Very useful tips, John. I’ve used Mint for a few months now and it meets my needs for a money-management program. Easy to use, customizable, and keeps my mind at ease. I have yet to try the envelope budgeting system, but that also seems like it may be a great idea when it comes to managing purchases not made on your debit or credit card.
Chris recently posted..Understanding Online Security for CPA Websites
Hi Chris – Mint is pretty good, but I find its really only a tool that tells you what you have spent, but doesn’t really help as much in forward planning and dealing with emergencies.
John Henry recently posted..DEALING WITH A PERSONAL FINANCIAL CRISIS
John!
Wow, thanks for your cool mention of YNAB. We work hard to make YNAB a quality tool that makes a difference in people’s lives. We don’t do bells and whistles, just budgeting.
Your post is a great overview of important budgeting steps! I think so many people have lost sight of the basic financial foundation they should have before tackling bigger endeavors with their money (like investing etc.) Thanks for such a solid piece.
Best,
Anne Gordon
YNAB Executive Assistant
Hello Anne – thanks very much for reading! Glad to have someone from YNAB reading that is for sure – its a great tool and one that has been extremely useful to me over the years. I’m waiting eagerly for the Android app so I can use it on the road too.
John Henry recently posted..DEALING WITH A PERSONAL FINANCIAL CRISIS
The word Budgeting is scary. However, with tools offered today, it can actually be a fun thing to do! I am a fan of Excel. It is user-friendly, loaded with options, and the perfect way to do budgeting and even analysis. I love the real-time changes that occur within the spreadsheet with just the use of formulas. Thank you for sharing.
@Zarina – I agree with you. There are a lot of free budgeting tools out there, but being able to use Excel would be great because I’ve become very comfortable using it at work. Can you recommend any good online resources? Thanks in advance.
Tina
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Hi Tina – a good template is available here –
http://office.microsoft.com/en-us/templates/CL102207099.aspx?tl=2#pg:2|ai:TC010290552|
@ Zarina … I’ve used Excel extensively over the years and it is a really good tool, however I think that the capabilities of unique tool are somewhat greater and you should really take a look at one of them.
John Henry recently posted..DEALING WITH A PERSONAL FINANCIAL CRISIS
I always wanted to go to a third world country, but thanks to Obama I don’t even need to move.
s long as you start early and keep it up – by the time people generally consider budgeting their finances are generally not as comfortable as they would like.we like this thanks for share you really nice.
Mircho5 recently posted..Matric Result 2011 BISE Bahawalpur Board
@ Kerwin – it is kind of scary what has happened over the past little while.
@ Mircho – thanks for reading and commenting!
John Henry recently posted..DEALING WITH A PERSONAL FINANCIAL CRISIS
yes one good tool in budgeting is about recognizing your needs and wants…I use excel in my daily budgeting…
Timothy Smith recently posted..DoUpTo- The Fastest Way to Make Money Using Your Talent updated Tue Jul 26 2011 1:56 am CDT
Hi Timothy – need vs want is absolutely essential! If you can do this correctly you are well on your way to handling your finances correctly.
John Henry recently posted..5 STEPS TO MANAGE YOUR CREDIT CARD
Twitter: inzolo
says:
I like how you described Mint – “money tracking application” and not a budget tool. I often tell people Mint is great for telling you where your money went, but not so good at telling it where to go.
Hi Dustin – yes, its surprising really, but most of the “budgeting” tools like Quicken, Microsoft Money and others are very similar in this respect. The great thing about YNAB and other envelope systems is that you assign your money BEFORE you receive – they call it giving “every dollar a job” which I think is an excellent description and way of looking at it.
John Henry recently posted..5 STEPS TO MANAGE YOUR CREDIT CARD
Twitter: inzolo
says:
John – Have you tried inzolo.com? I’d be curious to hear what you think of it.
HI Dustin – I took a quick look at the site yesterday and it seems to be a very robust and useful solution. I would love to make a more in-depth analysis of the site – one of my fears though is having all my information online – what sort of security is in place to protect users and also does it directly integrate with the bank or is it only through uploads of .qif and .ofx files?
John Henry recently posted..FALLING SKIES – THE ARMORY (1.02)
Twitter: inzolo
says:
Once you log in, all communication with the website is encrypted using 256-bit SSL – same standard as banks & others use. It is built on the python django framework with has many security features built in.
If your bank supports OFX direct connect then Inzolo can integrate with it and download transactions automatically. Otherwise, you can upload qif and ofx files, or you can even enter transactions manually.
Twitter: laseoagency
says:
Budgeting isn’t my strong point but I am starting to see the importance of it. I have to start saving for the future and stop living in the moment too often.
Marcus Cagle recently posted..Fargo Credit Unions with the Best Interest Rates Today
Hi Marcus – creating your emergency fund is a really good step to ensure that you are safe. Unfortunately you just never know what will happen in the future!
John Henry recently posted..5 STEPS TO MANAGE YOUR CREDIT CARD
I find that the best way to budget for me is to update monthly and mesh with long term goals (measured in years). Working on a budget that doesn’t change much bores me and doesn’t fit my lifestyle so it has to be more liquid and able to shift. Using programs like mint helps to graph and track where those changes are.
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In the current financial client that our country is facing, having a budget is more important than ever. I have always had one for my family, but recently I decided to rework it to make sure we were putting away more for our savings.
Jacqueline recently posted..Dr. Seuss Nursery Wall Decals and Other Decorations to Complete the Look
Twitter: venuesearcher
says:
Having spent 25 + years in the business this is sound advice, if you are starting out please prepare a budget and stick to it (with few exceptions). Most business don’t fail because they are unprofitable, they fail because of cash flow issues.
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@ Jacqueline – its really amazing where you can make small, simple savings that do not impact your quality of life and provide you with more capital – of course you can’t do this until you know where you are spending your money so budgeting is definitely the solution.
@ Gary – really good point about businesses. Unfortunately I have been on the losing end a couple of times when the company I have been working for went out of business – not because they didn’t have a good product or service or even paying customers, but rather, because they didn’t have a good grasp on their cash flow. Really good point!
John Henry recently posted..5 STEPS TO MANAGE YOUR CREDIT CARD
Twitter: cooking_courses
says:
Hi John,
Great article. I’m a qualified accountant and find it amazing how many of my friends don’t budget.
I know its not supported anymore but I use Microsoft Money (in conjuction with Excel) and find it works really well.
Best wishes.
Richard
Twitter: inzolo
says:
I hated to see Microsoft drop support for Money. I think they did a lot of great work promoting OFX direct connect and adding some viable competition to the 5,000 lb gorilla Intuit.
Dustin recently posted..3 Humorous Debt Videos
Twitter: itsgigi
says:
I forgot all about this “envelope” system of using a budget! I really like the simple way of doing this because I’m a total visual person. Thanks, Gi’Gi
@ Richard – most people fear budgets because they think that its only about limiting themselves and not being able to do everything they want. In reality when you know where your money is going and how much you have available – the freedom is significantly greater than you would expect. Its a hard sell to some people though!
@ Gi Gi – its a really old fashioned system, but the reason its still around is because it works! Its simple, easy to use and does what it is designed to do – really you cannot ask for more.
John Henry recently posted..DEALING WITH A PERSONAL FINANCIAL CRISIS
good info! The more organization the better
Mark recently posted..Pasta Completes an Olive Garden Dining Experience
In every business, budget is very important to make all plans possible. That’s why we need to make sure that we stick with our budget, otherwise, we’ll end up out of budget. Budgeting tools can really be a great help. Actually, I had that too aside from my excel file. Absolutely the best way to keep track your finances.
Samantha Dermot recently posted..Teeth Grinding Mouth Guards
@ Mark – thanks for reading and commenting!
@ Samantha – Excel is definitely a good tool to start with and if you have the skills you can personalize it quite significantly giving you some of the same capabilities as actual budgeting and finance applications. As your needs and requirements increase, you will probably want to upgrade to Access or something similar or end up with an actual financial application.
John Henry recently posted..SOME MORE TIPS TO ACHIEVE YOUR FINANCIAL GOALS
Yup, you’re right! When I’m still in my undergrad in accounting, our professors trained us to use excel sheets to do our accounting reports. That’s the time I’ve started using excel not only in our class but also for my own personal needs. Anyway, any applications are useless unless we stick on what input there.
Samantha Dermot recently posted..Mouth Guard for Teeth Grinding
Twitter: ourfamilyworld
says:
I used Excel spreadsheets a lot. Recently my bank offered an online tool that records my expenses, my income and provides records for the past months. I find it easier to use as you have everything on one window.
Thank you for your great tips.
Olfa recently posted..Staying safe at university
H, John,
I am glad to have read this post of yours, as I found some tips I can easily relate to.
I believe I am good in budgeting, as I never tend to spend more than I earn. I just spread the money the way I can, without running into debts, setting my priorities first and making sure I don’t owe money for the Electricity, Water, cable TV…while having enough food on the table.
I agree with you – the most important step in handling any kind of budget is, therefore, tracking the incomes and expenses on daily basis.
We ought to recognize the difference between what we want and need.
Kristina L. recently posted..PhantomPlate Coupon Code
Twitter: debtnational
says:
Hey John,
Great article. It sums up everything we always try and do. A budget is really the only way to keep your finances in line. I use spreadsheets for mine and additionally I have became a saver. Thanks for the great post.
Edward Culligan recently posted..Counseling Debt Services
Twitter: HughesGroupRE
says:
A very timely subject given the economic uncertainty across the world. Creating the budget is the easy part… sticking to it is whole different thing!
Kevin recently posted..Boise Ranked as #4 Real Estate Market in U.S. for 2011
Twitter: thepennyhoarder
says:
Since I’m self employed, I have really struggled with being able to use a budget. Does anybody have any budget tips when you’re income is ever-changing? I’d really like to build up my business account so that I can pay myself a predictable salary…
Kyle recently posted..Make Money Playing Fantasy Football
I find that creating a “virtual” envelope budgeting system using google docs is an amazing way to budget your money and it’s easily accessible everywhere.
Richard Brown recently posted..The Most Effective Budgeting Techniques
I hate budgeting my money, I’ll just categorizing and prioritizing things that are need to buy like the basic needs, but then when I want something to buy I use to save money for that particular things I want, that’s it!
Twitter: wakemanrealtors
says:
Hey John, Great post here. There is gold in your words. Now, if people will just pay attention and start budgeting for their future projects, things will go a lot smoother.
David recently posted..How To Find A Realtor
Twitter: nayrezk
says:
A very detail budgeting tip. I love the idea of using some apps to help us with the budgeting but the envelope system has helped me since I was a student until I got my own family. Though the high tech way sounds great and mobile, for me the old fashion way still works great for most of us… Hope anyone will agree
Ryan Hawan recently posted..Keep Up With Satellite TV On Your PC
Excellent article. For a follow up I reckon you should write an article detailing some of the free budgeting applications that are available for money conscious households.
James recently posted..Money Saving Tips For New Parents
I had a budget created when I purchased my home in the Fall of 2010, however, it has not been as successfully as I hoped it would be. I was unable to maintain it!!!!! I gave up a lot of my wants (i.e. cable/internet, dining out or going out, etc) for almost an entire year. It came vacation time, and while I didn’t have the money anywhere else accept from the monies that I’d been storing up since accuring a home, I used some. Then when I returned from the vacation, my car immediate brokedown, and I suffered two deaths before the end of 2011. All of my savings has been wiped out!!!!
I find, that the start of 2012, has not started out well….major dental emergency to the tune of $1800 plus dollars, and that took a piece, which I find myself on a payment plan until April 2012. I work everyday, and I am simply unable to get my BUDGET on track.
I don’t want to be back in a place where I am limited either. I still don’t have luxuries, such as cable/internet (makes entertaining difficult), I am unable to purchase new clothing. All my funds are sucked up by personal tragedies (vehicle expenses, deaths, medical). I want to see it getting better. I see other 30 somethings around me that seem to be able to do it all.
Help me find a budget that works, saves money that I don’t have to tap into for emergency matters and find the pot completely drained in a matter of months. Help me save a substantial amount monthly without getting a parttime job or giving up non luxuries like bath soap, toothpaste, etc in order to create a nest egg.