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Easy Budgeting for Non-Budgeters

Posted By Jim On 06/29/2009 @ 7:03 am In Personal Finance | 13 Comments

Budgeting isn’t fun. Very few people look forward to tracking all of their purchases, cutting back when they’ve overspent, and adjusting their budget from month to month to meet changing conditions. However, it’s a necessary chore, like cleaning your house or apartment, that you should do because it’s good for your financial health. But so is exercising and according to the Department of Health & Human Services, we as a nation aren’t doing such a great job at that.

When I first started working, I was a very diligent budgeter. I recorded every single expense in a document called a Budget Bible, built from a template my friend Melinda sent me. I budgeted to the penny, the most labor intensive of the five budgeting systems [3] I once wrote about. I kept it up for about six months but eventually I grew tired of it. It was important to budget to get a better handle on my finances, but once I had a handle the daily routine was unnecessary. I went from the most diligent of budgeters to a non-budgeter!

So how do I get back on the wagon? How does a personal finance blogger reform?

Use a personal finance tool. The most time consuming aspect of budgeting is in the tracking of expenses. With personal finance tools, that part of the process is almost automatic if you’re willing to provide your login credentials. I stopped budgeting because it was too time consuming to enter in all my transactions. With that part of the process practically gone, there’s no reason why I shouldn’t start budgeting again.

Unfortunately, the process of recording transactions isn’t 100% automatic. There will still be some transactions that the tools are unable to category or frequently mis-categorize. While they’re slowly improving their categorization algorithms, based on user feedback, the reality is that there are a lot of merchants and it’s often difficult to determine, with 100% certainty, what category something should be in. So, you will still have to do some work, you just won’t have to do quite as much!

Quicken, Mint

My two favorites are Quicken [4] and Mint [5] (there are about a dozen others, but those two are the only two sites I have an account). Mint because they’re so gosh-darn pretty and because they were one of the first and Quicken because it does a really good job of projecting your cashflow. If you’re living paycheck to paycheck and need help getting to the next level, I think Quicken is the best option for you because it tries to predict future expenses and warns you if you may have a shortfall. Mint is for the more personal finance savvy, people who are on solid footing and not in danger of drowning, and are looking to find leaks, make thing more efficient, and generally climb up to the next rung. For example, Mint will track your loans, investments, and property whereas Quicken will not. However, Quicken will try to predict whether you’ll spend more than you earned, where Mint won’t. If you don’t know where you fit, both are free so you can take a test drive to see which one is a better fit for you.

Let’s break down the budgeting process [6] and look at how we can use a personal finance tool to make it quick and easy:

  • Setting Up Your Budget
  • Tracking Expenses
  • Adjusting Your Budget

I’ll show how you can do it quickly in both Quicken and Mint, that way you may not even need a test drive.

Mint

Setting Up Your Budget

In my post about How to Budget [6], I discussed two ways to set up your budget. The first way is to simply guess at how much you should be spending in each category. The second way is to start recording your spending for a month and then use that as your baseline. Personal finance tools will do this for you as long as your spending was done on a credit card. Cash transactions, obviously, will disappear into the ether, so your budget won’t be 100% accurate. It’s accuracy will depend on how reliant you are on credit cards.

In theory, what would take your hours each month can be done in mere minutes as the tools sync up with your accounts. Here’s what the “Your Budget” screen looks like in Mint:

I didn’t have to do anything to get that overview. Mint picked some standard categories, estimated my budget, and created that screen. I can, by clicking on the dollar amounts in blue, change what my budget is for a category:

On that “Set a Budget” screen, you can see not only your historical restaurant spending but the US average as well. While comparing yourself with the US average isn’t going to be particularly helpful (a family of 4 probably spends more on food than an individual), it might alert you to something in a different category. (if you’re curious why my dining is so high, I routinely pay the dining bill with my Citi mtvU card and take the cash contributed by others)

Tracking Expenses

Tracking expenses is a cinch with these types of tools. You just provide your login credentials and they pull your transaction data. Periodically, especially in the beginning, you’ll need to categorize some transactions the tools don’t understand but eventually they learn. The categories are important because they ultimately roll up into your budgets.

Recording your transactions is one thing, tracking how you’re spending is keeping in line with your budget is another. Here’s where Quicken does a better job than Mint. With Mint, you are simply told where you are in the month, how much you’ve spent, and you’re left to do the rest. As you’ll see with Quicken, they try to predict potential shortfalls based on your historic spending.

Adjusting Your Budget

This part of the process is tool agnostic. How you adjust your budget will depend on your needs, though the tools can provide you with some valuable information to help you plan for the future. For example, you should adjust your budget for seasonal changes. It sounds obvious right? If it’s in the winter, plan for higher heating bills. If it’s in the summer, plan for more vacation and travel. But how much is “more?”

Mint does a better job at this. Click on Trends in the top menu. Here, you can adjust the time period of the “Where you spend” pie chart by adjusting the slider below the pie chart. If you want to know how much you spent a year ago, just adjust the period to July 2008 – August 2008. I wish they would adjust the “SpendSpace” chart underneath to be a full year (or let it be adjustable) but they don’t.

Quicken

Setting Up Your Budget

Setting Up Your Budget isn’t as quick as it is in Mint. After setting up your accounts, you’ll want to click on the Goals tab at the top.

You add your goals by selecting from the menu below and nothing pops up. There’s no historical data like in Mint, it just appears with the option to edit the dollar amount. All the dollar amounts roll up into the Overall Goal. You can click on Back and Next to see your historical data, if you are tracking anything, but it’s not like Mint where it automatic sets things up.

Tracking Expenses

Recording expenses works just like Mint. It automatically pulls in the data, you’ll have to massage it a little to get the categories right, but for the most part it works the same. Quicken does a better job at trying to predict your future expenses. If it sees that you have a regularly schedule bill come in every month, it will warn you that you may have a shortfall. Quicken uses a lot of reminders and alerts to make sure that you can avoid things like overdrafts and late fees. This is one of the reasons why I think that it’s a better tool for the personal finance novice.

See how the spending outlook gives you an idea of whether you might be spending more than you earn?

Adjusting Your Budget

A few months ago, the amount of historical data offered by Quicken Online was limited. Now, they’ve moved a lot closer to Mint in terms of offering up historical and actionable information to help you adjust your budget. Their “Money Trends” screen looks a lot like Mint now, with a pie chart, the ability to change the time period, and historical information you can use to adjust your budget. While it would be nice to see some of this information on the Goals screen, having it here is better than relying solely on the “average spending” statistic offered on the Goals screen.

Here’s what the Money Trends screen looks like:

Summary

I looked at how easy it was to set up a budget, track your expenses, and adjust your budget on two of the more popular personal finance tools. Hopefully, if nothing else, it’s shown how easy it is to budget nowadays. No more struggling with Excel spreadsheets or reconciling credit card statements, these powerful and free tools do it all for you.

The great thing is that budgeting is just scratching the surface of these tools. Many of them offer alerts and reminders, such as when you may be spending close to or exceeding your budgets, while others offer the ability to track you investments and give you detailed information about how diversified you may be (or simply think you may be!).

One word of caution though, you are giving a third party access to your financial accounts. It’s a security risk to do so and while many of them claim to have stringent security measures in place, one can never plan for every contingency. I think the risk is worth the benefit but I also recognize that if there is a security breach and my data is stolen, I was the one who gave it to them in the first place. Unless you can accept that, you should avoid giving out such sensitive information to anyone.

(Photo by kevincortopassi)


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

[4] Quicken: http://www.bargaineering.com/articles/r/quicken-online.php?tag=budgetNonBudgeters

[5] Mint: http://www.bargaineering.com/articles/r/mint.php?tag=budgetNonBudgeters

[6] budgeting process: http://www.bargaineering.com/articles/how-to-budget.html

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