Let’s face it: we’re gradually moving to a cashless world. Many people rarely have physical cash at all, opting to do most of their transactions via the internet or credit/debit card.
I would consider myself, at times, to be in that group, as I use online banking to pay almost all of my bills and use a credit card for gas and groceries, paying off the balance in full (via online banking) each month.
This is drastically different than how things worked even ten years ago. At that time, I paid all of my bills via check and quite a few of my other transactions were done solely in cash.
There’s a bit of a problem, though. The standard advice for budgeting in personal finance books doesn’t really take into account this transition. They advise keeping track of expenses in a ledger-like format or using envelopes.
Open up virtually any personal finance book you find at the library and you’ll see that their advice for budgeting is in a world before the advent of online banking and before people began operating in a mostly cash-less fashion.
Why would you expect the old budgeting techniques to work when such drastic changes to personal finance have been going on?
When you get right down to it, the core purpose of a budget, then and now, remains the same: you’re simply trying to divide up the money you make into sensible groupings.
When you operate mostly with cash, the techniques for doing that are pretty well established. I particularly liked the “envelope system,” where you physically put the money for each category into an envelope labeled with that category and that’s all you can spend. You have some cash in a “food” envelope, some cash in an “entertainment” envelope, and so on and you make those envelopes last until the end of the month. The “envelope system” is great, but it doesn’t transition at all to a cashless world.
The other common strategy is a written budget, where you write down what you’re going to spend in each category. Then, as you spend, you update each category by subtracting how much you’ve spent, leaving you with knowledge of how much you have left. I actually think this system is harder than the “envelope” method, but it can provide at least some foundation for moving to a system that works in a post-cash world.
Still, the fundamental problem of budgeting in a post-cash world is that the budget is even further separated from how and where we spend money. The old budgeting systems work because they can be used as a tool to physically constrain how you spend money. You can look in your envelope or your budget line and only take that much with you. That doesn’t really work if your transactions are mostly electronic.
The best solution I’ve found is electronic budgeting, which essentially takes the old paper budget and transforms it into an electronic form. This way, you can bring that budget with you wherever you go and use it as the first thing you examine when you go to make any purchasing decision, no matter where you are.
One approach is to use an online budgeting tool like Mint, which takes your electronic transactions and organizes them for you. Mint works very well, yet I don’t use it simply because I’m wary of sharing my personal information with anyone as an extra precaution against identity theft.
A much better solution, for me, is to budget using a spreadsheet or, even better, a program like You Need a Budget.
As I mentioned above, I operate mostly cashless. I also have been budgeting using my own spreadsheet solutions since 2006, but lately I’ve been migrating to You Need a Budget because it essentially does everything I was already doing with my spreadsheets, except I can also use it when I’m out and about using the smartphone app.
The entire philosophy behind using a spreadsheet or using You Need a Budget is simple: you still want something to indicate how much you should be spending in each category. The problem is that with electronic transactions, it’s very easy to separate what you’re actually spending from your budget.
The ability to literally carry a budget with you everywhere makes this much easier. You could do this in the past with a very well organized check ledger or other ledger book, but it was unwieldy. With an electronic budget, you can quickly see how much you have left to spend on “food” this month and keep your spending within that range using your smartphone – or, if you don’t have one, your computer. At a glance, you can make that decision.
The key thing to keep in mind is that the basic idea here is still the same as it always was when it comes to budgets. You’re still trying to keep your spending organized within basic categories. This only works if you’re able to maintain the strongest possible connection between the spending choices you make and your budget. Without cash, it’s hard to physically constrain the spending. Electronic budgeting, while not perfect, gets you as close as possible to that kind of ever-present reminder of your financial goals.
What’s next? I’d love to see a bank actually integrate You Need A Budget-like tools into their online banking system. The ability to assign spending limits for specific retailers would be quite powerful – and it’s something that banks could do. It would take the “envelope” system and bring it full circle.