Sandy knows she is growing her savings by having a surplus each month and putting it in high yielding online savings accounts. When she was puzzled about budgeting, she wrote in to ask:
I have $100,000 saved up in bank accounts by following good frugal practices that you and others outline. I however don’t budget and never keep track of my expenses. I know I’m saving money because my account grows every month. Why should I budget?
Good question Sandy.
I know it’s tedious to keep the expenses tracking up-to-date. Plus, it’s not like neglecting to enter all the data has any immediately noticeable impact on us anyway. However, maintaining a budget is like maintaining a bridge. There may not be problems even if you neglect maintenance for a long time, but consequences can be disastrous when an accident finally occurs. There are many reasons to make a budget and keep track of all expenses aside from growing a surplus. I list a few below for your consideration:
1. Builds Discipline and Organization
Having a budget helps you stay disciplined to organize your finances, which is the first step in knowing your overall financial health. Without easy to read data, there is no way of know what is going on. The good news is that once you have a routine going, then it doesn’t take that long to have everything up-to-date.
2. Forces You to Think About Money
This is a side benefit of having a budget but it’s an important one. The more time you spend thinking about your money, the more focus you are in building your wealth. Once you start thinking about money often, you will be able to find more ways to save and more ways to generate income.
3. Crisis Prevention
Looking through your finances at regular intervals will allow you to spot trends and see areas that can be improved way before it becomes a problem. By preventing a crisis from starting, you are way ahead of everyone else who can only react.
4. Great Tool to Start Family Discussions
Money is always a hard subject to discuss. If the whole family is involved in budget making and expense tracking, it makes discussions much easier. It’s always a good idea to just lay out the facts when talking about money matters and the expense tracker is the perfect tool to aid in this regard.
5. Quantifiable Way of Measuring Progress
In theory, we all want to reduce our spending and make more money but knowing how well we are doing without actually keeping track of your progress is impossible. Tracking your budget to measure progress is not just a benefit but a requirement if you care about becoming more efficient at saving money.
Without a budget, how do we know that we are meeting our goals?
6. Knowledge is Power
By keeping track of your budget, you will know exactly how much money you need every month. You can then plan and build an emergency fund with a high degree of confidence in having sufficient cash. You can also easily figure out how unexpected issues like losing a job or having a child will affect your financial health.
7. Stress Reliever
Knowing your exact financial situation lifts a tremendous amount of stress off your shoulders because you don’t have to worry about the unknown. Even if your financial situation is shaky, you will be spending time fixing the problem and not trying to find out what the issue is.
But David, maintaining a budget is so hard!
I get it.
Budgeting and learning how to spend your money wisely for the first time is a challenge for everyone. You’re bound to make mistakes too. To get you started, let me give you four steps to make things easier.
1. Know Your Take Home Income
When you get your first job, you will get a salary offer. Let’s say you’ll be making $20 an hour or roughly $40,000 annually. Does that mean you’ll be taking home a little over $3,300 a month?
Absolutely not!
When you get your first pay stub, you’ll see that many expenses are deducted from your paycheck, such as state and federal taxes, social security income, and health insurance (just to name a few). This can take up a very large percentage of your gross pay, on average 25%. It’s important to know what your true net or take-home income will be so that you can properly budget.
2. Understand All Your Expenses
Whether it’s your first time living away from your parents or you’ve lived on your own since forever, you need to make sure you understand what all your expenses will be. This includes the big items, like rent, all the way to the little things, like toilet paper. If you’re trying to figure out how much to spend on rent, a good rule of thumb is 30% of your gross income, but that also depends on where you will be living. If you’re in a big metropolitan city, that number could be a lot higher.
Also think about your food costs, which will probably be your second biggest expense. If you’ve never had to do grocery shopping before, a good first step is to just hit the grocery store with a list of necessary items you need to buy weekly. Get a gage of how much everything costs so that you can better budget for this in the future. Remember, all the little things add up so make your budget as detailed as possible.
3. Be Organized, Track Everything
One of the most important things about managing your finances successfully is organization. You simply just need to track everything very well. Once you have that down, you’ll have an accurate snapshot of how you’re spending and what you should cut back on. Many people forget the little things, like your daily cup of coffee, but a small expense like that can add up in the long run.
Make sure you’re keeping track of everything. The easiest way to do so is by starting a spreadsheet where you input your expenses. Tools such as Mint.com are also great to use because you can integrate it with your bank and credit card accounts to help you track your purchases.
4. Save, Save, Save
Being on your own for the first time is exciting and there will be an urge to do everything and spend on everything. But remember that it’s important to live within your means because not doing so will get you in a lot of trouble down the road. Start good financial spending habits now. Have a small budget for discretionary spending, but for the most part: save, save, save.
Start an emergency fund as soon as possible — because you truly never know what can happen in life. It’s also never too early to start thinking about retirement. With the power of compound interest, the earlier you start saving for retirement, the more you see later on.
{ read the comments below or add one }
It is important and necessary to track budget.
Im sure there is more than 7 reasons. I’ve got in the habit of setting up my Google calendar reminder so I do my budget every month. I try like crazy too stick too it. Get in the habit of getting a receipt for every purchase. Has helped me too.
Have you tried just typing in the numbers as soon as you get home each day? Almost no one does it this way, but then I feel like it’s much easier than saving a ton of receipts and having to file a whole bunch.
It may seem like it’ll take more time since you have to open and close the spreadsheets and stuff each time, but I also don’t have to deal with constantly looking at a stack of receipts on my desk.
That’s a good idea. I type the numbers in right after I get home. I hate looking at a stack of receipts as well.
It is always a healthy habit to track your budget. It makes you to think about the expenses that are important and unimportant. Of-course, it builds discipline.
It is always a healthy habit to track your budget. It makes you to think about the expenses that are important and unimportant. Of-course, it builds discipline.
As a mortgage broker or adviser I recommend that people are smart with budgeting and use PocketSmith which is an online system that sync’s with your bank accounts taking the manual data-entry out of this.
You can upload your past 3-months statements and code the expenses to see what you have been spending and wasting money on, then set mini-budgets to target certain areas of expenditure.
CLICK HERE and get PocketSmith for free.
I was looking for an app for while, but ended up with setting up a simple google form that captures expense records and saves it in excel file in the drive. Also sent link for form to my wife so transaction are saved in same file. It easy set everything up and analyse afterwards. And the main thing it is fully customizable and free 🙂
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Wow, $100,000 in bank accounts. Obviously depends on her monthly expenses and investments but that much in an account earning basically nothing just seems like a waste to me. Just goes to show that, without a budget, even the best savers could be throwing money out the window in lost opportunities.
Making a budget is something we all talk about but few actually do it and keep track for any period of time. I challenge anyone reading this to start a budget and keep in current for just 6 months. I bet you’ll find money you never thought you had.
I think budget tracking is more important than people realise. Making a spreadsheet of all of my outgoings for each month has really helped me to know exactly how much money I’ll have for each month!
I don’t track some things, like food since it doesn’t change much month to month, so I just plan for a decent number in my budget. No sense in tracking fixed expenses like insurance since that won’t change. One tip I would say is don’t try to categorize all your purchases into budgets. Its madenning to follow a dozen small budgets for occasionally purchased things like clothes or movies. Instead, lump them all into a discretionary fund. I track that closely and stay within 200 bucks a month. Some months I get clothes, some months a fancy meal, maybe a new videogame. No sense in making budgets for all those items! Another tip I have is to use a powerful free app called Mint. Its amazing for budgeting and tracking accounts. Its a little buggy linking with the advanced encryption my bank uses, but it usually works. Its available online, chrome app, and android app. Probably iOS too but I don’t know.
It’s funny how many people are just too scared to look closely at their finances because they know they will be going nowhere (or backwards).
There are some GREAT apps out now to help you keep track on income v expenses.
I need to cut down on the coffee…
I think this article hit the bullseye. I’m 38 and started budgeting for a house about 5 years ago; and no one was more frugile then I was making a mere 35k at the time. 5 years later after becoming obsessed with my budget, credit and concentration on my goal – I’m a success. I purchased my first home 4 months ago! And it wasn’t easy but I did my best to make if fun. I couldn’t be more happier. I now want a rental properity. I make a little over 50k a year now and basically broke because of the purchase of the house. However, there is no way any goal can be completed without being concious of ones budget, unless of course your wealthy. This article is worth sharing with anyone who has a goal.
I think of myself as Disciplined because I know “When” The Bills are due. Each Week, I have to Pay for Something.
Week 1: Internet & Bus Pass for Transportation
Week 2: Car Registration, Cell Phone & Credit Card #1
Week 3: Credit Card #2
Week 4: RRSP-GIC Contribution, Car Insurance, TFSA.
Since I get paid on Friday, I get up a little earlier, go into the City and then do all of by Banking by Phone and then get a Confirmation Number and since the Account is cleared only on Tuesday (Two Business Days), I know that it’s done.
I also use a Transaction Register Book that I bought at Staples that has been very helpful. After a Bill is Paid I take my Date Stamp put in the Amount and indicate when it was Paid.
I don’t know why but after seeing Alicia Florrick do the Bills on The Good Wife while Peter was in Prison, it made you realize just how important it was to stay on top of things.
I recently started living as a sole parent with five children and I was ignoring setting up a budget, this lead to blowing a lot of money of fast food I deemed as necessary for our survival. As it is tax time a lot of money was coming in to support my spending habit. I worked on my Excel budget last week, set up additional online accounts, have money scheduled to go into each account, where payments for bills etc will come out. I was saving to buy a house in the future for me and my children, but only achieving this because of the additional money I had coming in. I read the frugal living article and instead of spending the surplus on unnecessary puchases I am going to park that in my savings account. This blog has helped me gain the courage to keep going with this dream, even if all my friends are spenders and don’t have budgets. I aim to remind myself that they could do it too if they wanted to.
David, do you have a place for examples? I had someone ask me about the Excel spreadsheet I use and would like to provide the template. A discussion of the various softwares and online management systems provided by banks would be cool too. Thanks!
Tracking you money is good and with our bank they have a pie chart that you can use to track your spending. Trouble is that we have one for normal household use and one that is for the CC. I use a spread sheet to balance the checking account so it kind of helps in noticing unusal spending which is why I still like using checks. I’ve found that it is a whole lot easier to use the CC to impulse buy even though I am in a position where I can still pay it off each month easily.
Greetings,
First of all, I just discovered your blog site today and have been reading a bunch of articles in it and found also that I enjoy reading the comments section from people following the articles. I will be reading this site on a weekly if not daily basis now.
I have used Microsoft Money program since 2007 or so and found it to be a great way to track and organize your finances and expenses. I used to use the old check book register balance method but now have scratched that and just stub all my receipts in Microsoft Money every evening (or every other). I am the kind of guy that has to know how much money I currently have in my checking accounts to the dollar at least so know when can spend how much where without overdrafting. I do “NOT” set up Microsoft Money to automatically synch with my checking accounts online as I find this to tedious and would rather just track manually. I do download from my credit card accounts on a monthly basis as they all have a Micro Money section in which auto downloads all transactions on stated date range. I found this to be a great tool come tax time or what not when you want to look at a whole year’s expenses and see what money went to which categories. It also has a section in which you can set to budget certain expenses like “dining out” or “auto fuel costs” and it will go to red status when you go over set amount each month. It will also show your net worth vs debt based on all accounts you have entered into it. I still need to get my 401K added to this program as I have not done that yet. I recommend Micro Money as a good daily expenses tracker as well as overall financial portfolio overview and budgeting tool. Funny thing is the only reason I started using this was it was already installed on my computer and free to use (and I didn’t want to put my finances up in an online cloud like Mint). I can see that I need to get my credit card debt paid off and get my emergency fund back up from $3000 to $5000 as goals for 2012. I will keep reading this site, thanks!
Tracking a budget is one of the wisest thing one can do for their financial part. It’s not so time consuming if you do it on a regular basis and don’t let things clutter. It helps you see all your budget compartments. And instead of
charging your mind with too many details and spend energy to keep them active, jotting all that down is way easier and efficiently.
Great article. Budgeting is a great tool, the problem is it requires time, effort and consistency. For many, it’s very hard to do, but I guess once you push yourself and develop a habit, it works wonders on your financial life!
I’m in need of a tracking system/ “dashboard” so that i can get a better grip on where my money is escaping to. I’ve hears good things about Mint.com and American Express now offers one of their own. Any other suggestions? Also, how do you feel about the security of these and other sites? Seems like a lot of info to put out in a cloud. Thanks for all the great input..
There are some things that I know, as a CFP, that should be carefully budgeted for. The program that I use allows categorization of items as mandatory, discredionary, and income. The reasons that this can be very helpful would include death, disability or job loss. Also, when people get ready to plan for retirement it is very useful to have a history of expenses compared to budgets.
In the 2 months since starting budget tracking with Mint.com, I have gone from “where did all the money go?” to “Wow, where did all this money come from?”
I don’t have to balance my checkbook–it gets done for me to the penny every day. I know what my net worth is. Instead of being afraid of checking my bills, now I am excited at how each one will show up in the proper little budget file and give me a red, green, or yellow flag to show me how I’m doing. It’s keeping me completely honest about where the money “really” goes.
It’s critical to find a budget-tracking system that works. I was trying to do it with the cash-and-envelope method. It used to work. I’m beyond that now, it seems. Mint.com is robust enough yet simple enough to make sense for me.
So I have to agree that absolutely honest budgeting and record-keeping is essential to living the frugal life and discovering that the money really is there–you were just putting it in the wrong place.
Fantastic advice on keeping your finances under control, especially the part about budgeting yourself regularly. I’m sure a lot of people would save themselves financial hassle if they had planned out their finances right from the start. I also appreciate the point you made on discussing finances with family. It’s important that people in a family work together towards saving.
I do agree with Avatar to some extent, that some people may not have the need to budget as much as others if they have a lot of control over their expenses. But it may be important to track where your money is going once in a while just to keep a trend. You hit that point quite well.
And Leslie did a great job in pointing out the difference between budgeting and tracking your expenses. Even if someone budgets all their money, they might find out in the end of the month that not everything went out as planned. Budgeting needs to be accompanied by tracking expenses.
I’ll stop rambling but you did well, Moneyning, by saying budgeting is also about lowering stress, discipline and the like. Most people don’t see budgeting as having that attribute. It is good to emphasize the psychological affects of budgeting as opposed to only the practical purposes.
The excel file is a good idea, but yeah, budget tracking can be a little tedious. I normally just track credit purchases rather than all expenses made during the day as it helps me see the bigger picture.
I read your reasons and they are exactly why persons need to have a budget tracker. Even though we see ourselves having a good balance in the saving department there is another which is not doing well. Sometimes we have the belief that our goals are being met but the budget shows us otherwise and so everyone need to do a budget. It takes discipline and commitment to stick to a budget but after couple months of practicing them it will become easier.
These are some great advantages for starting budget tracking on a regular basis. I think that everyone should culminate this habit in order to have a better understanding of your finances in general. I agree with you that it is a great topic to discuss with your family as it makes sure that everyone is on the same page. It also improves collaboration amongst family members should there be a situation where one member requires the help of another.
I just don’t like doing budgets every month MN. Once upon a time i did a budget for 6 months straight, but after getting busy I stopped doing it for one year.. And decided not to proceed.. I think that being frugal and thinking about purchases on the want vs need psychology is more important than simply tracking your expenses. But then knowing your expenses is an important part of knowing how much you need to generate from dividends/passive income/..
Tracking every dime is a lot of work, but I highly recommend doing it for at least three months now and then (or for a full year if you can stand it)…just because the information it provides is really useful.
1. It allows you to plan a realistic emergency plan, knowing ahead where you can cut and where you can’t, and how much you need to have set aside to weather the storm.
2. We found that it also gave us the opportunity to evaluate some expenses/purchases and decide if they were really worth what we were paying. (The total costs weren’t clear when the expenses just disappeared into regular spending.) We decided that we were spending way too much on cars (and chose to downsize and drive less) but that the gym membership was worth every dollar. You might decide differently. I felt more sure of my decisions after knowing how much we were really paying for things.
This post has been chosen as part of the 69th Carnival of Money Stories at Almost Frugal, going live July 22, 2008.
I agree that we should start tracking our finances for us to save for the rainy days.
Leslie,
You’ve hit the nail on its’ head and explained it better than I could.
🙂
I don’t think enough of a distinction is being made here between budgeting and tracking expenses. For example, we budget for household expenses and minor splurges (going out to eat, for example), for three types of savings (retirement, house project, and emergency), to reduce our debts faster than the normal payments would allow, and to give us each a wee bit of pockeet/play money. We keep money for each of those things in separate account: A joint checking account for house hold bills, savings which serves as joint checking overdraft for bigger household purchases (mostly remodeling but also gifts and now a wedding), emergency and retirement savings accounts, and separate personal checking accounts for our individual play money. We have a pretty simply budget oversite process: When we run low on money in an account, we stop spending, we never spend emergency money except for true emergencies, and we never touch retirement for anything. I’m not going to micro-track our expenses since things change up and down all the time anyway. For example, we might have a bunch of clothing expenses one month then nothing for a years; our food expenses have gone up substantially both with the rising costs of food and with our choices to eat mostly locally and organically, but that just means we can’t/don’t go out to eat as much. It works out without recording every single receipt, mostly because we don'[t spend money we don’t have (credit) and we think about every purchase we make. Tracking every expense is needed to figure out how to get and stay out of debt, and how to save more money; it’s really not necessary when you’re already doing pretty darn good in those areas.
Hi Leslie,
Glad you tend to agree with me. Tracking expenses is useful but being too overly conscious about it, may be counter productive.
If there were a good system to track expenses however, it would be different.
From where I am, Malaysia, most expenditures do not come with receipts especially those at the grocery shops and hawkers. So it’s tough sometimes to track EXACTLY how much I’ve spent over the course of the day.
Rgds
As someone who is already credit-card debt free, who saves (retirement, household, and emergency) a very substantial part of our income, and who pays extra on the few debts we have (mortgage and one car loan), I tend to agree with Avatar: I don’t see any need to track my spending in that level of detail when I already have painstakingly over the years learned to carefully evaluate each and every purchase. And when you say, “Even the most frugal person would splurge once in a while as long as he/she has the money to spend,” what’s the problem there?.? For example, as you can probably relate to, I’m getting married in a few weeks, just a small civil ceremony in California. We didn’t set some random budget figure, we just decided what we really needed and made good choices: My dress is only $130, my partner’s outfit comes to less than $100, we’re staying in a friends’ borrowed apartment, our few guests are paying for their own dinners since we did not want to pay for two receptions since we’re going to have a full religious ceremony next year, we chose a low-mid priced restaurant, and we’re not doing anything touristy that’s absurdly expensive. This is the reason why we put over $1000 a month into the account that’s used for house fixups and other things that aren’t part of the monthly budget (and this is on a combined salary that’s still just 5 figures).
That said, we use our debit card for pretty much all of our everyday purposes. I can then look at our statement and see how much we spend on groceries and household goods, how much we spend on gas, how much we spend on going out to eat, etc.
I know I’ve rambled too much, but I really do think that it’s not necessary for folks to track every purchase who are not in significant debt, if they are saving what they need to save, only spending spending money they HAVE after savings (not normally spending savings, or putting things on credit), and are evaluating every purchase. And if someone like that (like me) isn’t allowed to splurge every once in a while, then what’s the point?.? ::grin::
whether frugal or a spender, loaded or in financial difficulty, I think budgeting is a GOOD thing. Even rich people go bankrupt.
It can be stress relieving to know you are on a plan and even better to know you have a plan of getting out of dept. Maybe you need to check the budget everyday or once a month. Whatever your situation, you will always have a plan for the future, spending money now and the knowledge of knowing where you stand as to spending in this very materialistic world.
thanks for the reasons. I think they are not new for almost all of us
Avatar: I actually just use a simple excel file. I tried Microsoft Money but I found it too complicated.
I have the perfect remedy to fix the “real time basis” problem. I have to remember to post that article since I have that idea in my huge “to-do” list.
Stay tuned 🙂
I’ll wait for you to share your experience on this. I did track my expenses in the past but gave up since I couldn’t jot it down on a real time basis, especially with work and all.
Too lazy to do so at night, after work.
Maybe you could elaborate on how you managed to keep track of your expenses and the what type of software you use. Quick Books?
I for one am interested to see how this could be done effectively and efficiently.
Rgds
Avatar: Actually it sounds like a lot of work but does it really take that much? Everyday, how many receipts do you really have? For myself, I have 2, maybe 3 at the maximum so if I put them in every night, I don’t need to spend much time at all.
I agree that setting it up takes time but that’s a one time investment. Also, analyzing it takes time but considering that I can always find some savings, I don’t mind it at all.
I haven’t written much which software I use but I should one of these days. Thanks for the tip 🙂
Money Ning,
I somewhat agree with your points. Just that sometimes I wonder whether the benefit outweight the costs and time spent trying to keep track of all expenditures.
It’s time consuming to track all manner of expenditures. Any ideas on what’s the fastest and best way to do this.
Not sure if you’ve blogged about this, but if you have, do let direct me to it.
🙂
Sandy: Anytime.
Curt: Agreed. The earlier the better. In fact, it’s probably a good idea to start as soon as you need to manage money.
Avatar: Even the most frugal person would splurge once in a while as long as he/she has the money to spend.
Budget tracking is really helps you identify where to save more. Those who never budget track is often surprised how much they are really spending.
By comparing different month’s expenses, you can truly see which expenses are necessary since on impulse, many things might seem necessary.
Sam: Starting young and training how you value money is very important. I completely agree there.
Agree with Curt, starting your budget earlier is better. This way, you’ll value money especially when you start working and the pressure of using your credit card to purchase unnecessary stuffs is unavoidable.
Sam
Fix My Personal Finance
http://fixmypersonalfinance.com
I don’t quite agree. I think this depends largely on the person.
A thrifty type of person would usually think twice before spending money on anything. Why bother keeping track of expenses if he’s sure that all these expenses are necessary?
At most, one needs only keep track of expenses over a 3 months periods to assess the trend.
It’s may be more important to review the savings every month or every quarter rather than looking over your shoulder for expenses every now and then.
However, for those people who spend heedlessly, then this may be great advice.
It’s harder to budget when you are in financial trouble, so the best time to start is in college or before college.
Budgeting can be very stressful to start when you are force to start because of a financial hardship. The good news is that anyone can learn to budget and budgeting can be customzied to fit each family – which is perhaps why it’s one of the best methods to manage your money.
Get a hold of you money – start a budget.
Thanks for the advice. I’m glad I email ya.
I love Knowledge is Power.