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Budgeting Is About Your System, Not Your Tools

Posted By Jim On 02/02/2010 @ 7:35 am In Personal Finance | 25 Comments

Yesteryday, I wrote a post about zero based budgeting [3], a type of budget that forces you to assign each dollar of income to an expense category. I think it’s a very good way of budgeting but one that can be difficult for nonbudgeters (I think envelope budgeting [4] is the best way, of the five budgeting systems [5] I’ve discussed, for nonbudgeters to get their feet wet).

However, in writing about all these budgeting systems, many of which are very similar, the conclusion is that there is no right way to budget. There is only a way that gets you to financial independence, the way that works best for you and your situation. In reviewing all of these free budgeting tools [6], it all went back to the simple idea of spending less than you earn.

How to Pick A Budgeting System

The first question you have to ask is why do you want to or need to budget? There are several answers but they fall into one of two buckets:

  • I want to budget. If you want to budget, you are already half of the way there. You need to pick a system that matches your tendencies. If you love statistics, trying to spend 10% less or have zero spend days, then you want to pick one where you track everything to the last penny and can tweak to your hearts content.
  • I have to budget. If you feel like you have to but don’t really enjoy the prospect of budgeting, then you will want a system that doesn’t jar your daily routine. Avoid systems that have you track everything expense down to the penny and instead try something like envelope budgeting. You want to ease yourself into budgeting because otherwise you will drop it.

Establishing a Baseline

In both cases, whether you want to or simply feel you must budget, you now have to establish your spending limits on categories. You can do this one of two ways – guess or measure. I recommend a compromise. Guess what you are spending in each category and adjust your budget after the fact. You will have to overcome a bit of cognitive anchoring [7] but I feel that it’s better to guess and adjust than not budget for a couple months just to set a baseline.

Once you’ve established your baseline, pick the budgeting system that works best for you and do it “manually” at first. You can track your spending on a little notepad or enter it into spreadsheet later on. As you develop your system and firm it up, you should get a better idea of your spending habits so you can be more effective later.

Now Pick a Budgeting Tool

At this point, you will want to take a look at some tools to see which one fits your needs. You don’t want to force yourself into a tool’s system, you want to pick the tool that fits your system (which will be an amalgamation of several “basic” ideas). Unless you’ve developed the system independently, you won’t know which tool is best.

What’s your budgeting method look like today? How as it evolved?


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[1] Tweet: http://twitter.com/share

[2] Email: mailto:?subject=http://www.bargaineering.com/articles/budgeting-is-about-your-system-not-your-tools.html

[3] zero based budgeting: http://www.bargaineering.com/articles/how-to-build-a-zero-based-budget.html

[4] envelope budgeting: http://www.bargaineering.com/articles/bvc-16-introduction-to-envelope-budgeting.html

[5] five budgeting systems: http://www.bargaineering.com/articles/brief-look-at-five-budgeting-systems.html

[6] free budgeting tools: http://www.bargaineering.com/articles/free-online-budgeting-planning-software-tools.html

[7] cognitive anchoring: http://en.wikipedia.org/wiki/Anchoring

Thank you for reading!