Financial Planning Blog

When it is done right, budgeting is really about being very purposeful with your spending. It is best summed up by the John Maxwell quote:

"A budget is telling your money where to go instead of wondering where it went."

In other words: Decide what you are going to do, write it down, do it, and know what you have done. This is the essence of the four fundamental elements of budgeting:

1. Prioritizing your needs and wants: Decide what you are (and are not) going to spend your money on.
2. Creating and documenting the plan: Write it down and agree on it.
3. Executing and living the plan: Do it...figure out how to live according to your plan.
4. Tracking your performance: Know what you've spent and how well you are following your plan.

The first two fundamentals have been discussed in previous articles. The final two are where the rubber hits the road and are examined below. There are also more helpful links for those looking to get started on their spending plans.

Executing and living your plan

"A budget tells us what we can't afford, but it doesn't keep us from buying it."-- William Feather

"Your money is like soap. The more you handle it, the less you'll have."--Eugene Fama

Once you have established your spending priorities, you need to live by them. If you are fortunate enough to have sufficient resources to cover most of your wants, this may not be so difficult. For most of us, though, this probably means following through with key decisions like cancelling cable TV, dumping your personal trainer, or selling that F-250 with the hefty payment. These one-time actions may be painful, but once you execute on them they are done and you start reaping the benefits. Often harder is following through on the recurring choices such as not going out to dinner, not buying those shoes, and not going on that unplanned weekend trip. However, if you have bought into a set of overall priorities, you are focused on attainable goals, and you are making shared sacrifices (assuming you have a partner in this endeavor), these behavior changes are achievable.

Key considerations and behaviors:

• Automate as much as possible: Automate your savings toward important goals and setting aside funds for irregular expenses. This can be done quickly and securely with today's on-line savings accounts. You can set up the amount and which day of the month you want money to be automatically moved from your checking account to your on-line savings account. This ensures that these high priority items get funded first. Experts in field of behavioral finance extol the virtues of this kind of automatic savings. David Laibson of Harvard says, "We need to exploit automaticity. We need to build in more of these commitment mechanisms, so we can live up to our intentions."
• Set up separate savings accounts for different goals: On-line banks make creating multiple named savings accounts easy. Consider multiple savings buckets for your emergency fund, new car or major purchase fund, a vacation fund--you name it. Putting a name on every dollar is powerful, especially when the goal is extremely important (e.g. college for your kids), or pleasurable (e.g. that vacation to Hawaii).
• Put aside money for irregular expenses: We all face significant expenses that do not occur on a regular monthly schedule. The effective way to manage these irregular expenses is to put adequate money aside on a monthly basis, in advance. Whether you use a single savings account (or even a cash envelope), or multiple ones (for insurance, clothing, presents, car repairs, etc.), it is up to you. However, if you simply leave this money "unprotected" in your checking account, much of it is likely to disappear and be unavailable when you need it.
• Identify areas for special control: If you are like most people, there are a few areas that are especially difficult for you to stay within budget. Consider using cash and the "envelope system" for those two or three areas that routinely get out of control. Groceries and going out to eat are prime suspects. Or, you might need a Home Depot or movie envelope. The point is, when the money is gone, you get immediate feedback and stop spending. People talk about some of the creative meals they've had after the grocery envelope got emptied.
• Will power may not be enough: If living according to a spending plan was easy, more people would be doing it. Besides the encouragement and teamwork of a spouse, you will likely benefit from the support and accountability of a like-minded community. Find others on the same journey, with the same goal of getting their spending under control and making progress in their financial lives. Likewise, you need to be aware of the kind of company that may derail your good intentions, and take appropriate precautions.

Tracking your performance

"Some couples go over their budgets very carefully every month; others just go over them."--Sally Poplin

"The person who doesn't know where his next dollar is coming from usually doesn't know where his last dollar went."--unknown

In many ways this last fundamental of budgeting should be getting easier for everyone. As more of your spending is moved from cash and check to on-line bill payments and credit and debit card transactions, the flow of our funds should be easier to track, even from your phone. (That is assuming you can still afford that iPhone after you have created your spending plan.)

Key considerations and behaviors:

• Pick a system to track your spending: Although there are many options for tracking your spending, you ultimately have to pick a system you can live with. If you are just starting out, you might want to do some experimentation with different methods to find what works best for you. This doesn't have to be fancy. Many people are still find manually consolidating expense data on an Excel spreadsheet, or with a calculator, a workable solution. However, now there are a number of more automated alternatives, many of them available for free. (See below.) Although an automated tracking system, with your accounts linked to a service like Mint, can save time and give more immediate feedback, you will still need to get things set up to work best for you.
• The right level of detail: Face it, you are not going to know exactly where every penny goes every month. Find the right balance between your time and effort and the level of information you track. If you are someone who balances their checkbook to the penny every month (which is certainly not a bad thing), resist the temptation to have the same level of accuracy tracking your budget.
• Feedback and adjustment: Simply knowing where you spent your money isn't enough. The goal is to track where you spent your money, compare it to your spending plan, and make necessary changes. Allot enough time to review and analyze your performance to determine if it is your spending behavior, or the spending targets that need to be adjusted.
• Communication and accountability: Finally, you need to use this information in a positive way, one that moves you forward toward your goals. Knowing how you are doing relative to your plan should result in meaningful communication and teamwork. You are constantly asking, "What are we doing right?" And, "What do we need to do to differently in order to meet our objectives?" Accountability for spending is generally a good thing, but if couples use the expense tracking to beat each other up, it can become counter-productive.

Tools and links:

• Mint.com--free on-line personal financial tracking system
• Mvelopes--on-line home budgeting system 
• Quicken--personal finance software
• YNAB (You Need a Budget)--budgeting system
• Check register (manual) budget tracking system--Montana State University Extension
• Excel home budget templates
• Budget software reviews, with additional links

Creating and following a spending plan may sound like a lot of sacrifice and hard work. Maybe it is. But, when you take active ownership and control over your spending it pays enormous financial and emotional rewards. In times of significant financial uncertainty--and, is there ever a time that is not uncertain--your spending decisions are the one thing you have control over. As Bill Schultheis of the Coffeehouse Investor encourages his readers: "We focus on the most important aspect of building financial wealth--how we save and spend our money."