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Stupid-Proof Budgeting

One of the first things you will hear from anyone who is helping you with your finances is about budgeting. A budget is usually the difference between someone who has their finances under control and someone who doesn’t. The problem is that budgeting is often on the to-do list right up there with “going to the dentist” and “cleaning the toilet.” You know you should do those things but really don’t want to.

If you are like me and hate budgeting, I’ve got a stupid-proof easy way to do your budget. After getting setup, it requires about 10 minutes or less per week to maintain and will help you develop a fully functional budget.

What You’ll Need

  1. A computer. Any computer will do.
  2. An internet connection. You are probably reading this via the internet anyways.
  3. Access to online banking. If your bank doesn’t offer this for free, get a new bank.
  4. A Mint.com account. It’s free. Just head on over to Mint.com.
  5. A good 2 hours and a lot of determination to get it setup. Don’t worry! Once it’s setup, it’s quick and easy from there.
  6. Once you have all of these, you are ready to get started.

Step 1 – Get your Mint account up and running

Head on over to Mint.com and add all of your accounts. You can add checking accounts, mortgage accounts, credit cards, and even investments. Certain items may not have online access such as your mortgage, but do the best you can.

Once you put all of the information in, you should have a nice list of what you’ve got working for you off to the left, which will look like this:

You might also notice at the bottom that you can add Property. This will help you determine your Net Worth and help you stay focused on goals such as paying down your debt or increasing your wealth. It’s always nice watching your Net Worth increase (or at least go from negative to positive).

You will have to manually give an estimate on what these items are worth. You can use Zillow.com for an estimate on your house and Kelly Blue Book for your vehicles.

Now I should note that this Net Worth number may be inaccurate if you don’t have access to or choose not to add all of your accounts online. For instance, I have some investments with Fidelity that are not listed. The important thing is to watch this number get better as time goes on.

Step 2 – Create your rough budget

There are many great ways to start a budget [3]. I won’t go into great detail as that would be a whole article in itself but here’s basically what I do:

First, pull out a pen and paper or use an Excel Spreadsheet to list your income and expenses. I throw all of my regular monthly bills (the type that usually come in the mail) into a big category. So my cell phone, electric, water, mortgage, etc all get lumped together. These bills might change slightly from month to month but overall they stay relatively consistent so I don’t worry about them at all.

Then I take the remaining income after my bills and divide it up into micro-budgets. These budgets are completely decided by me.

We decided to have a discretionary spending fund for my wife and myself each month. We like to go out on dates and have a date night category. We also take my wife’s little brother out to movies and such and have a category for that. You could use a more generic “Entertainment” category and throw all of those micro-categories into it if that’s what you like. It’s totally up to you however it’s better to be more specific than more generic.

You will obviously need “Grocery” and “Gas/Fuel” categories so don’t forget those but for everything else just make up a budget that works for you.

Step 3 – Categorize items on Mint

Now comes the really long boring part. Please bear with me through this because it’s very important.

You are going to go online and put every item for this month and last month into their appropriate categories. Under the “Transactions” tab on Mint is where you do this. You can create new sub-categories as needed. We put “CJ’s Shopping” under the main Category “Entertainment” as it’s an entertainment type of category.

I know this takes a while but you just have to grit your teeth and do it. Make sure you do last month’s as well. Last month’s spending will help you figure out if you were WAY off on a budgeted amount for a particular category and you can adjust accordingly.

Step 4 – Create micro-budgets

Now you go into Mint and create micro-budgets to watch these extraneous categories. This happens on the “Overview” page. This is where the “magic” happens.

Here’s an example of what my micro-budgets look like:

Now let me explain what you are looking at. You can see the category names on the left. Don’t worry if your categories are completely different. Do what works for you.

The numbers on the right are for the amounts I decided to put into each budget. I’m trying to stay below this amount each month.

The black line in the middle shows how far through the month we are with the date at the bottom. As you can see, when I was writing this article we were half way through June.

The colored bars show what percentages of my budgets I have spent with the actual amount I’ve spend on the end. Green means I’ve spent less of a percentage than the percentage we are through the month (I.E. We’re 50% through the month but I’ve spent less than 50% of the budget for that category). Yellow means I’ve spent higher than the percentage we are through the month. Finally orange means we’ve overspent in that budget.

Lastly note that although we are a bit overspending in a few categories, the Total at the bottom still shows we are under our spending limit. The ultimate goal is make sure that the Total bar never turns orange.

This should give you up to date information on how you are doing throughout the month. It’s OK if you slightly overspend in some categories as long as you make up for it in others. If you notice that month after month you overspend in a particular category, then increase the budget for that category and reduce another category.

Step 5- Maintain the budget

Mint.com [4] puts certain items into certain categories well but doesn’t do much about custom categories. For instance, all of my Bashas or Safeway transactions automatically get put into the “Groceries” category but if I bought a book on Amazon.com, it won’t know to put that in “CJ’s Spending.” So each week (or day if you so choose) just take a few minutes and clean up the transactions to make sure they go in the proper category. It literally takes me less than 10 minutes each week to do that.

It’s important to schedule a time and date to go over your finances. Otherwise you will get complacent and forget about it. If you are married, make sure you and your spouse sit down together so you both are on the same page on what categories you can spend in and which ones are off limits (the dreaded orange categories).

When a budget turns orange or gets close to orange, STOP SPENDING!!! It’s really that simple. As you can see, my wife has no more discretionary spending left this month. She took a trip to Washington to visit her sister and spent her budget. That’s ok that she did that but she knows now that her spending is finished. You have to agree with your spouse and yourself that once a budget is full, it’s over. Nor more spending PERIOD!

If you stick to this, it will make budgeting very easy and straight forward. Trust me, I hate budgeting so anything to make it easy and painless is great by me.

One final note: If you own an iPhone or an iPod Touch, there is a great little app that will help you track your Mint budget from wherever you are. You can search for it in the iTunes App Store or click this link [5].

This is a guest post from CJ Perry at Wise Money Matters [6]. CJ focuses on basics of personal finance with the intention of helping people get out of debt. You can visit him online at WiseMoneyMatters.com or subscribe to his podcast on iTunes via this link [7].