Yesteryday, I wrote a post about zero based budgeting, 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 is the best way, of the five budgeting systems 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, it all went back to the simple idea of spending less than you earn.

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A zero based budget is a budget where every dollar you earn is assigned to a category in your budget. Your income minus your expenses equals zero – zero based budget. The idea sounds very simple, and it is, but the real value in creating and following a zero-based budget is that it requires you to plan very deliberately ahead of time and track it very closely as you go through your month.

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With the unceremonious shuttering of Microsoft Money a few months ago, a lot of former Microsoft Money customers are looking for alternatives. If you were using Microsoft Money Essentials, Plus Deluxe, Plus Premium, or Plus Home & Business, your software will still work but support will be gone.

Fortunately, there are a lot of alternatives in the online budgeting tool chest. After a recent Personal Finance Hour show all about budgeting, I took a look at several software tools. This post will cover all of them briefly to help you decide which might be right for you (and they are not ranked in any predefined order).

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Last night, on the 25th episode of the Personal Finance Hour, we discussed mostly about budgeting and touched on some popular budgeting tools. PearBudget is an online budget management tool, mentioned by both JD and members of the chatroom, that I had never heard of.

PearBudget’s tagline is “really simple budgeting” and it delivers on that promise. Within ten minutes, I was able to setup a budget and begin tracking expenses without even entering an email address. You can play with the full tool right from the start, without even registering. That’s uncommon in any tool, let along a budgeting one.

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This morning I published a You Need A Budget (YNAB) review explaining the YNAB methodology as well as a look inside the tool. If you’re thinking about buying it, I recommend that you download it and do the 7-day trial first. Don’t buy it sight unseen when there’s a 7-day trial available giving you full access to the tool, so click here to download it before paying.

Then, when you’re ready to upgrade YNAB, we have a special 10% off coupon code:

Also, YNAB 3.0, which is slated for a November release, will cost $59.95. If you buy YNAB 2.0 for $49.95, actually $44.96 after the 10% off promotional coupon code, then you will be upgraded to YNAB 3.0 absolutely free. YNAB 3.0 not only looks more visually appealing but will sport additional features like expanded report functionality over 2.0.

For years, my budget consisted of an Excel spreadsheet that documented every purchase I made every single day of the year. As a numbers guy, this wealth of data was amazing and helped me tweak my spending, find my financial leaks, and reach financial goals much sooner than I would have without budgeting. Since then, I’ve been tentatively using online personal finance tools because of the security issue and instead I rely on Quicken’s desktop application, which is one of the most comprehensive tools available.

What if you just want to maintain a budget? Enter You Need A Budget. You Need A Budget, often called YNAB, is a desktop budgeting software package that will help you set, maintain, and stick to a budget. It’s a much better version of what I used to hack together in an Excel spreadsheet.

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Here’s a little video discussing the ins and outs of envelope budgeting, how it’s done (at a basic level), why you might want to consider it, and my thoughts on its effectiveness. I’m by no means an expert on envelope budgeting, but I do understand the basics, so I invite those of you who do use this on a regular basis to chime in with your thoughts!

One 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.

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Personal finance is boring, but with a little work and preparation in the beginning and some time spent checking in, it can be put on autopilot. That’s right, just spend a little time setting up your personal finance strategy and then spend a little more time each year just to check in on it, and you can ensure that you’re ahead of the average for your age and live comfortably. While leaving anything on autopilot can be tricky, it’s better to participate and be on autopilot than to not participate because it’s too “hard.” Below is a discussion on the different parts of personal finance and how to put them on autopilot.

Retirement planning: 401(k), Roth IRA

401(k): If you’re starting a new job, it’s been mandated that your employer automatically enroll you into the 401(k) plan if it’s available and allocate your funds into some very basic and safe fund. All you need to do is log in, double check your contribution amount (make sure it’s over the level at which your employer will match your contributions), double check the funds you’re contributing to, and then log out. If you have been on the job for a while and aren’t participating, call up HR for the enrollment form immediately. After you submit it and they set it up, just follow the easy instructions above. Then, just once a year, check to make sure everything is okay and that your allocations are what you think they should be. Do this for 40 years and you’ll be way ahead of the game in terms of retirement funds.
Roth IRA: If you don’t have one, opening a Roth IRA takes literally ten minutes. Some brokerages will let you do auto-deposits every month so divide the annual limit (this year the limit is $4,000, in 2008 it’ll be $5,000) by twelve and set your contribution allocations as you would the Roth and don’t worry about it. You have until tax day to contribute to your Roth IRA for the previous year (you have until April 15th, 2008 to contribute for 2007) but make sure your payments indicate which year they apply to.

Budgeting

The envelope budgeting method is by far the easiest and requires the least amount of tracking and thinking. The premise is that you have different envelopes based on category of spending and that you put how much you can spend in each envelope for that month. As you spend, you pull the money out and when you run out, you no longer spend. It forces you to budget and establishes a simple framework to help remind you. First, open up an ING Direct checking account (email if you want a $25 bonus). I recommend ING because you can open up new accounts within the interface of your first account in minutes, it’ll take much longer at a regular bank. Open up as many accounts as you have “envelopes,” or categories of spending. Link up your local checking account to your ING accounts and have your paycheck direct deposited into your ING. Then, setup recurring transfers from your main account, where funds are direct deposited, to your envelope accounts, which govern spending in a particular category. As you spend money, withdraw the funds from your account and the balances will reflect how much you still have left in your envelope.

Investing

Investing is truly no different than 401(k) or Roth IRA autopilot, the difference is in which brokerage you choose. I have no recommendations other than to say that if you prefer a particular mutual fund (I prefer index funds), then go with one of the larger mutual fund companies like Fidelity or Vanguard. On index funds they simply cannot be beat on fees and that’s all you should care about with index funds. If you want to invest in stocks, you’re on your own because I don’t think you can really put that on autopilot. While I don’t believe in checking your stocks daily, unless its for entertainment value, you have to check in periodically to read news and keep up to date, so it doesn’t lend itself well to putting it on autopilot.

Saving

Finally, saving is again no different than investing or retirement planning because fundamentally all you’re doing is putting money into an account for an expressed purpose. In fact, you should have a goal, a reason to save, because it will help you remain diligent. Mechanically, automatic savings are easy. Many banks have automatic withdrawal features that will let you withdraw a set amount each month from a linked bank account. Simply establish a goal, figure out how long you have, and setup regular and automatic transfers into a high yield savings account to reach your goal. It’s that easy!

Bills

Many companies will let you link up a bank account or credit card so that your bills are automatically paid on time each month. There is one downside to setting this up, a company can then charge you on that method of payment for things you never realized you authorized (here’s an example of an unauthorized billing from a reputable company). The upside is that you’ll pay at the last minute and you won’t pay late, two pretty good reasons to set up auto-billpay. I have all my bills automatically paid this way from my cell phone to my mortgage to my electricity and water bills. The sheer convenience, and I save on stamps, can’t be beaten.

See how easy it is to set up your personal finances on autopilot? One thing to note is that while it may be easy to setup and convenient to simply let it run, you should check in periodically to ensure that everything is running properly.

Envelope budgeting is a very popular and very intuitive way to budget your spending.

I had heard the term used frequently but I never really understood what the whole envelope budgeting process was or why it was successful. In fact, I actually thought envelope budgeting meant that you were loosely tracking your spending on the back of envelopes or something like that (I was totally wrong!).

Envelope Budgeting

In envelope budgeting, you categorize your spending into broad categories and assign an envelope to each. You might have one for dining out, one for groceries, one for utilities, etc. You decide how much you will spend in each category for the month and put cash into that envelope. As you spend in the category, you take money out and return the change. If you run out, you must pull from other envelopes.

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