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Brief Look at Five Budgeting Systems

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Clever Way to BudgetOne of the interesting discussions that came out of the Personal Finance Blogger’s Conference in San Francisco was a discussion of how people budget and some of the budgeting styles. While we didn’t explicitly go over some of the more common budgeting systems, I felt it would be useful if I hit on a few to see where their benefits and drawbacks are.

Personally, I did the Track to the Penny system for a few months until I got a good handle on my monthly expenditures, then I essentially did the Reverse Budgeting/Nothing strategy. In between the two systems, I reviewed my expenditures to see where my spending was going and whether I could make some improvements. I saw that I was eating out far too often, a detriment to both my wallet and my health, so I took steps to start buying more groceries and preparing lunch more often.

Envelope Budgeting

The appeal of envelope budgeting is in its simplicity, though there are plenty of tools out there that will gladly make it more complicated for you if you’d like. The system relies on a series of envelopes, hence its name, to budget and each envelope contains a fixed amount of money for that expense. An example would be an envelope for groceries, where all grocery expenditures would come from that envelope. If an envelope is depleted, the funds must come from another envelope in the system.
Benefits: Simple to use, intuitive, and fixes your expenditures at a certain amount. In monthly reviews, you can see which envelopes are consistently non-zero and use that to adjust your budget.
Drawbacks: Cannot handle large emergencies, as a big emergency could break the bank. Limits the number of categories you can track, unless you have a million envelopes, and is less flexible in our credit-happy age.

Reverse Budgeting

Reverse budgeting is the idea that you save first, then spend the rest. This system is a back-ended system in which you force the savings, thus guaranteeing it, and then let the chips fall where they may on expenditures. By auto-drafting these savings out of an account, you essentially guarantee you won’t “accidentally” spend them away. An example of this would be if you set your 401(k) contributions ahead of time to draft from your paycheck and then let your spending go where it goes.
Benefits: Simplest process of them all, simply save and then you can spend from one big envelope.
Drawbacks: Lacks visibility into expense types for expenditure improvement, doesn’t force you to have the “budget discussion.”

Tracking to the Penny

With “Track to the Penny” budgeting, you track every single expenditure you make into a giant spreadsheet as you make it or in batches at the end of the day. You can then use this information to make future decisions about spending and this helps you identify “budget leaks,” or those small expenditures you don’t think about but end up costing you a lot each month.
Benefits: Total visibility into your spending, tremendous amount of information, a statistician’s wet dream.
Drawbacks: Most labor intensive, may give too much visibility, easiest to discard because of time requirements, relies on your ability to correctly categorize spending. This also doesn’t force a “budget discussion” but does provide good information for the budget discussion later on.

Tracking to the Dollar

Similar to Track to the Penny, Track to the Dollar just means you can round up or down each expenditure to the nearest dollar with the belief that it will all average out.
Benefits: A little less visibility compared to “Tracking to the Penny” but still a statistician’s wet dream.
Drawbacks: Still requires a lot of labor to keep track of incremental expenses, but less so than Tracking to the Penny.


Not budgeting is a budgeting system but it requires that you have an income that comfortably exceeds your expenses and probably not a good place to start. In our discussions, SVB mentioned a “black box,” referring to the budget, where she said that once you get a good handle on your budget you really don’t need to track it anymore. JD then said that budgeting is most valuable when your income and expense lines are very close… it’s less valuable once your income exceeds your expenses.
Benefits: It’s the easiest “system” because you do nothing!
Drawbacks: You get no visibility into your expenditures because you’re not tracking anything!

How do you budget? Do you have a good system in place that you want to share?

(Photo by kevincortopassi)

{ 16 comments, please add your thoughts now! }

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16 Responses to “Brief Look at Five Budgeting Systems”

  1. Jason R says:

    When my wife was still in college, and we only really had my one income we tracked to the penny, now that we have two incomes we don’t track at all (although we do auto draft away a lot of our income). We’re finding though as we get more used to the idea that we can spend more money are habits are changing and we may start tracking again if it looks like we’re spending even all of our not automatically invested money.

  2. savvy says:

    I use reverse budgeting. However, I use MS Money and review the monthly reports to see if any categories seem out of line with the somewhat arbitrary ‘budget amounts’ in my head. I also use an Excel spreadsheet to look ahead in terms of irregular or one time expenditures (yearly dues, large purchases).

  3. GBlogger says:

    We are fairly close to Savvy in terms of methodology — we reverse budget by having a large part of our saving/investing automated, we use Quicken to get some periodic check-ins on our expenses, and we use a spreadsheet to look ahead. Since most (though certainly not all) of our expenses make it into Quicken, we can take a pretty decent look at our expenses if needed. I wrote two recent posts on what we do with budgets (How We Try To Control Our Expenses Without Much Of A Budget and Silly Rabbit, Budgets Are For Kids–How We Do Use Budgets).

    It’s interesting to hear about the PFBloggers conference, Jim — blog more on that, if it strikes your fancy!

  4. Mr. Stupid says:

    Me and Mrs. Stupid use the “Nothing” strategy, with the “$200 Veto rule”. This means that if either of us wants to spend more than $200, we have to run it by the other first.

    When I first started budgeting, we tracked absolutely everything, but as I’ve accumulated more wealth, I’ve accumulated more numerous and complex accounts. At one point I had to give up, because Quicken did a horrible job of tracking things like the sale of stock options, split trannys with a double lyndie, and various other basic financial tasks.

    -mr. s

  5. Marie says:

    We track to the penny. We are presently a family of 4 living on 21K a year. Next month we move into a house (tax return was our downpayment) and triple my spouses income. Because homes can bleed money we are going to continue to track to the penny. It will be interesting if we give it up in a year though when things calm down financially.

  6. Darin H says:

    We track to the penny, mostly because I enjoy it.

  7. ACAShereIcome says:

    I track to the penny using PearBudget. I keep it simple only tracking 8 variable and 6 irregular expenses. It’s easy for me to keep track of since I place most every purchase on plastic.

  8. Lord says:

    I track to the penny by envelopes. It only takes a second to categorize receipts and stuff them into envelopes. At the end of the year, it takes only a few hours to tabulate and balance. Painless and informative.

  9. saladdin says:

    To the penny with excel.


  10. Jane says:

    I Reverse Budget/envelope system. The reverse budget is my main point where I autodraft each paycheck. I use the envelope system in the broad sense as I give myself an “allowance” of cash for most of my expenses each paycheck as well.

  11. CH says:

    We use the reverse budgeting pretty effectively.

  12. Polly says:

    I use Quicken religiously (have it on my Axim PDA as well) so I always know exactly where I am financially (yes, I’m probably a little OCD). My budget is based on historical income and expenses. I live below my means. All but $250 of each paycheck is deposited into a savings account linked to my checking account. Money transfers automatically when needed. I transfer any money leftover from my previous check into savings as well. I have no debt other than my mortgage, which I am now “snowballing,” and I contribute 10.5% of my income to my retirement account. My goal is to pay off my mortgage and live debt free!

  13. Randal says:

    unfortuantely mine is of the black box variety 🙁

  14. Ryan says:

    I use excel and track to the penny. I can also use my bank’s website to ‘group’ similar expenses together, so when I do budget for a month, it doesn’t take as long. My fiancee doesn’t appreciate the time it takes to do this, until she realizes that we have saved more each month since I started doing this in January.

  15. steve in w ma says:

    Cash envelopes all the way. It is the *most effective* method I have ever used and I’ve tried most of them- “zero-based”, reverse budgeting, and tracking to the penny. I’ve even tried the “no budget” technique. I’m still paying my debt off from that one! And the cash envelope system is making it possible.

    Nowadays, It only takes me maybe an hour in the entire month to make out my cash envelopes (I only use food, fun, and gas envelopes) and to schedule my online banking payments. And I’m saving about 40%, 60% if you count my debt payments as savings ( which is reasonable, because when I’m paid off in 2 years, those payments will be added to my savings as well) of my income. And I don’t really need to think about money except for one time per month when I do my deposits and set up my envelopes and schedule my payments. (since I keep a two month cushion in my checking account).

  16. Jenn says:

    I do the To The Penny version, but now it’s just because it’s useful for long range planning. I started when income and expenses were very closely matched and I needed to plan ahead to make sure a bill wasn’t paid ahead of the paycheck being deposited. With increasing salaries, reducing expenses, and no more debt repayment we now live comfortably on 50% of our take home pay. Theoretically I don’t need to micromanage the money any more. Now I just do it because I like to have a plan and know exactly where things stand now and down the road.
    I do the Excel spreadsheet and have everything planned out 6-12 months ahead. It’s not rocket science. Most of the money we spend is not a surprise. The phone bill is always due in week 3 of the month. The mortgage comes off every other Monday. We get paid on alternating Fridays. We spend the same on groceries and gas each week. I plan out the weeks in advance and then each weekend convert all my planned amounts for that week to the actuals that went through the bank account or onto the VISA. (I pay everything I possibly can on VISA for the travel miles, but I pay it off every WEEK. I’ve never paid interest). As the weekly “plug” numbers are converted over to the real amounts through the year I can see if I’m exceeding or bettering my planned amounts for each expense.
    The advantage of this system now, is that if I want to skim off some excess into our retirement fund I can enter an amount and see weeks/months ahead what effect it will have. I test lots of “what ifs” this way. I can accurately predict when we’ll have the cash saved for a trip, a vehicle replacement, new roof, etc. At this point micro managing is just a habit and takes very little time. The trade off of never being surprised is invaluable.

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