Updated on 08.25.10

Getting Real Value from Budgets

Trent Hamm

Compound Interest 14When I reached my financial bottom in April 2006, one of my first responses was to simply start reading a lot about personal finance. I checked out a pile of books from the library on personal finance and tackled a lot of different suggestions from those books, along with some of my own ideas that I came up with as I went along.

One idea that was repeated over and over was how incredibly important and valuable having a budget was. I tried several different budgeting approaches and stuck with them for short periods, but the idea of a budget just never really stuck with me. The constant recording of expenses and estimates of spending in the future and so on always seemed like a bunch of busy work that never really went anywhere at all for me.

What did I do instead, then? I focused mostly on just watching what I spent. I did find a lot of value in simply jotting down every dime that I spent in a pocket notebook and, soon, I began to resist spending because I didn’t want to write it in that notebook any more. I began to really focus on how I spent my money in a few key categories – books being the big one. I set up some automatic transfers to take care of specific bills and to start saving for specific goals. Perhaps most importantly, though, I began to really change my behaviors and how I spent my time.

There are two big things to recognize from this story.

First of all, the actual personal finance choices I made were budgeting. Writing down my expenses, setting up automatic payments and savings, focusing on problem categories – those are exactly the type of things that make up budgeting.

More importantly, however, they led me to the same theoretical goal that budgeting has – a more responsible relationship with my money. That’s the destination of budgeting – a relationship with your money that enables you to have the freedom to effectively not worry about the money too much and just get on with your life.

If that’s the case, then why do so many people fail at budgeting – and why is it still recommended so often in personal finance books and on personal finance sites? I think the answer to that question explains why budgets are so often described in personal finance books – and also explains how people can get real value from “budgeting” their own way.

Budgets, Budgets, Budgets: Why?
Take a look at the people who are typically authoring personal finance books. They’re CPAs, CFAs, and other folks who deal with finances for a living. They’ve likely always been strong with math and never been afraid of dealing with large chunks of numbers – it always came natural to them.

I’ve always enjoyed math – in fact, I was just a few credits shy of a minor in mathematics in college – but I’ve never been much of a fan of business or accounting math. Large rows of financial figures have always caused my eyes to glass over. I enjoy chasing down a problem, but adding up figures and making estimates is not something I enjoy or naturally want to do with my time. I can do it, but it doesn’t feel natural to me.

The important distinction here is that the traditional way of doing a budget is something that comes from people who are financial planners and accountants – people who are naturally gifted with working with lots of numbers and spreadsheets. That’s great, but it doesn’t accommodate how many people look at the world.

Not everyone is as comfortable with numbers as a CPA or a CFA. That’s not to say they can’t do it, but numerical analysis isn’t as easy or natural for many people as it is for a person naturally drawn to accounting and financial fields. The advice given on budgeting in personal finance books often comes from those folks who are naturally gifted with numbers and thus their budgeting advice is often challenging for others to follow.

A Better Solution: Focus on the Goals
Instead of focusing so intently on the exact process of budgeting as shown in a personal finance book – and, even worse, viewing yourself as a failure if you can’t keep it up – focus instead on the goals of all of this.

Why are you thinking about budgeting in the first place?

Most of us try budgeting because we simply need more breathng room in our monthly and yearly finances, for various reasons: repaying debt, saving for a big goal, building an emergency fund, or something else entirely. We know that the route to this is getting our spending in check.

The solution, of course, is to trim a little spending out of a lot of areas in our life.

The usual way of doing this is to sit down, sort our spending into a lot of different categories, and make estimates and targets for monthly spending – a very number-heavy process.

But, really, all that budgeting is doing is saying “I need to cut spending in these specific areas.” It’s difficult to cut spending in a lot of areas, but those are great areas to cut back in.

Because of this, I wound up with a solution that worked really, really well for me. I like to call it zero-sum budgeting.

Let’s say, for example, that I have $200 a month set aside for our energy bill. I’m on the “budgeted” energy plan that averages out the energy costs for the year. I also have $100 a month budgeted to spend on whatever I want, so one month I use $50 of that to install a programmable thermostat and also on some caulk. I program the thermostat to turn off the heating and cooling when I’m asleep or at work and I use the caulk to air-seal my home. Next year, the energy bill gets reduced because you’re using less energy – now it’s just $165 a month.

Here’s the key part. Instead of just spending that extra $35 a month, I start putting $35 a month automatically into savings. Since I was already making ends meet with the $200 energy bill, It makes no difference in my day-to-day life if I just put $165 towards the bill and $35 into savings instead of just $200 into the bill.

You can do the same thing with any category of spending once you have a good estimate of how much you spend in that area. Let’s say, for example, you spend $50 on media purchases a month – DVDs, books, and so on. If you decide to “budget” just $25 a month for that, start off the month by automatically putting $25 into that account.

You can also do the same thing with “found money.” If you come into a small windfall, just stick some or all of it into the account. If you find a great way to save some cash as a one-time opportunity, put that saved money into the account.

What can I use the money in that account for? If I’m building up an emergency fund, I just let it keep building until it’s an amount I’m happy with – a few months’ worth of living expenses. If I’m paying off debt, I clean out the account each month and use it as an extra debt payment. If I’m saving for a goal, I just put that money towards whatever goal I’m saving for.

Two points.

First, this doesn’t work if you’re already spending more than you make. That type of behavior is not sustainable. If your credit card balance is going up each month, no amount of budgeting or planning matters until you’ve reached a point where that credit card bill goes down each month.

Second, it works best if you focus in on a specific area or two. Budgeting is a lot like dieting. If you go cold-turkey crazy, you’re going to have a very high likelihood of rebounding and undoing all of your good work. Instead, focus on one or two areas for conscious spending cutting and, at the same time, look for “one shot” opportunities to save money now or reduce ongoing expenses.

Any time you commit to financial change, willpower is required. However, it doesn’t require an accountant’s head for numbers. It requires a focus on goals, a willingness to actually make some behavior changes (one step at a time), and a desire for real change in your life.

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  1. brystal says:

    My friend Rachel introduced me to calculating a percentage on our budget spreadsheet. It really helps when looking at what you have been spending as a part of the total income.

    Here is what she said, “The main thing that has helped me manage our MASP [Monthly Allocated Spending Plan] is including the recommended percentages for each spending category. I put the recommended percentage next to the category, and because I use Excel for our MASP I created a formula for each category to calculate the percentage of the amount we are actually spending. This has truly helped me to see if we have any overweight categories–for example, our utility expenses are usually high due to a couple factors, one of which is the amount we spend on TV, Internet, and Phone. Since it’s so obvious that these are issues when I see the percentages, this is something we will definitely tackle when our contracts are up this summer.” (She did a whole budgeting series on our blog – Motley Moms.)

    I also agree with the zero-sum budget, Trent. We squirrel away what seems like pennies at a time. (We actually roll loose change when we find it.) My goal this summer was to save $2000 and we actually saved $3700 using zero-sum.

    Finally, amen to will power. That singular factor has saved us more money in the long run than any other thing. Saying no to non-essential items.

    Best. Decision. Ever.

  2. Leah says:

    Here’s my big question (and why I’ve had a hard time with budgets):

    what do you do with truly erratic earnings and expenses?

    I work in a field where I might have a job for 3 or 6 months and then no job later. I save A LOT — basically, whatever I can. Some months I spend next to nothing because my job has given me housing and/or food. Some months I spend more.

    I know I have fixed expenses: car insurance and health insurance. I always get gas at least once during the month (but sometimes just once and sometimes twice a week — like I said, my job situation is erratic).

    Right now, what I do is just save as much as possible. I’ve never gotten into “trouble” with money . . . but I have to admit that months with a $1k credit card bill freak me out, since some months my bill is as low as $250-300. I also have trouble spending money when I do have it because I worry a lot about the future.

    I just started grad school for my teaching license and have a stipend, so life should be evening out here, money wise. But if you’ve got ideas, I’d love to hear them — both for me and for others like me that have a lot of stochasticity in their lives.

  3. Christy says:

    Like Trent, when I first began reading personal finance books, I discovered they all said write down your expenses. In the beginning I tried many different recommended ways of tracking my expenses. And frankly this did not work for me. I did not really get the hang of budgeting until I approached this from the end. I needed to see the big picture of my spending before the details of my day-to-day spending.

    I wrote my income at the top of a sheet of paper. After that I estimated my fixed expenses for a year. For example, I knew the amount of my rent, car payment,and auto insurance. I deducted these fixed expenses from my total income and then what I tracked was spending on categories that had the potential for variation like groceries, entertainment, and travel.

  4. valleycat1 says:

    I’m with Christy – if you’re not a number/spread sheet kind of person, it works best if you set up your own method instead of trying to force your life into someone else’s format.

    I first started working with a budget because my pay was every 2 weeks – not twice a month, every two weeks beginning with the first week in January. So I would have rent & utility bills coming due at various times in my pay cycle for the year – I had to make sure I had set aside enough $ to get those bills paid on time. I paid bills right after each payday, and I’d write in how much I paid in the various categories so I could keep my estimates up to date.

    I did the zero-sum thing when I paid off my car – immediately set up an automatic draft to savings for the same amount, & it has been pretty painless way to save. Back when I used to get an automatic raise every year (not lately due to the economy), I’d start from the first higher paycheck to increase the automatic draft by at least a portion of that as well, as we were doing ok living on the original income.

  5. Marinda says:

    We use a auto deduct for the bills, one credit card, paid in full every month and download that info into a program. This works because we pay ourselves first (into retirement/savings) and then pay everyone else. This works when your spending is under control (you spend less that you make) but makes for very easy record keeping. If there is a burp (what happened this month when you check the credit card bill online daily or at the end of the month) you can self correct.

  6. Dima says:

    The only way budget worked for our family was to put the savings aside first. We figured out up front how much we could save each month and we put that money away before anything else. After that we started figured out where we can trim down monthly expenses to save more. We had to lock up credit cards and put the savings at the bank account we couldn’t get to easily at first as we had no discipline.

    I wrote a big detailed post on this on my website. I am not sure you allow links out on your blog, Trent. In case you do and you think it is benefitial to your readers, here is the link to the post: http://www.chickencount.com/how-to-save-money-the-only-way-that-works/

  7. Money Obedience says:

    Budgeting and recording expenses are personal. What works for one, may not work for another. That is why we created a budget application that “talks” to its users via text reports rather than tables. There are just too many people out there who are not comfortable with numbers. (Go to moneyobedience.com for more info.) – My own budget was very numbers driven because I do like numbers. According to your post, I should like these finance numbers since I can add CFP and CFA to my name ;-)

  8. Greg says:

    The easiest way I found to save, was to figure out how much I needed for my bills and other monthly costs. I would direct deposit into a checking account enough to cover those costs, plus a bit extra for flexibility. The rest, I had direct deposited into a savings account. As I received raises, bonuses, or overtime pay, the extra all went into the savings account. I readjusted the amount going into my checking account, with the rest still going into my savings.

  9. Rebecca says:

    I think a lot of people have the idea of budgeting wrong. They seem to think budgeting is the same as living at a subsistence level, and try to set up the budget for the minimum amounts, or try to set up a budget without a real idea of what they spend. Most sources I’ve seen suggest starting by figuring out what you already spend- that is don’t change any behaviors or write a budget until you know what it is you actually spend. Especially for those people who are just starting to get their finances under control, this is probably the most important thing. I don’t know how many times I’ve talked to loved ones who are trying to get their finances under control and (since I’m working on getting those letters after my name LOL) ask me what they should do. If you make multiple trips to the grocery store a week, you probably will underestimate what you spend a week. Same if you buy lunch every day. “oh I spend about $50 in groceries a week” when its $50 a trip to the store (and you go two or three times)

  10. Hard to believe you were at rock bottom only four years ago.

    Regardless, I think budgets are essential–for those that need them.

    They can work against some. If you can do it without, you may want to try.

    Not living up to a budget you’ve created for yourself could be demoralizing and lead to a path back into debt.

    I attacked my debt but was alwasy weary of putting something into place that was unreachable.

  11. Rick says:

    At the risk of being flamed for promoting something, I must tell you about a budget tool I use. I use YNAB (www.youneedabudget.com). I’ve been using it for over two years now, and I tell everybody about it. Yep, they sell a computer program, but the beauty of YNAB is not the software, but the METHODOLOGY. It works!

    YOU still make spending decisions, so YNAB won’t singularly get you on track, but it is a fantastic tool, one that is well worth checking out.


  12. Brittany says:

    I love doing my finances in my super-cool excel spreadsheet every month. I play Eye of the Tiger and everything. But I also teach math, majored in econ, and embrace my nerdy mathness awhile ago.

    @Leah–I would recommend setting up a revolving savings account (just a regular account, the “revolving” part comes from how you use it). Figure out exactly how much you spend each month (not just bare bones, but sustainably, regularly). Multiple that by the number of months you anticipate not working next year + an extra month or two of wiggle room. Divide it by the number of months you anticipate working (minimum). This is the amount you need to save every month when you are working, so you can live when you aren’t. Then, when you won’t be working, transfer a month’s worth of money at a time into your checking account–paying yourself a “salary.”

    The longer you do this, the more “wiggle room” months you can accumulate, so you don’t have to frantically save every penny when you’re working–just enough to cover your expenses.

  13. SavingFreak says:

    @Leah – what we teach in our financial coaching is that people who have irregular, cyclical or seasonal income should have a known slumps fund that is somewhere between 3 to 6 months of your income (depending on how up and down your business can be).

    You need to determine what your monthly budget needs to be (include, some savings, some giving, etc.). This is what you will live off of every month. When you have a great month put the extra money in the known slumps fund. When you have a bad month pull money from the fund to make you monthly budget come back to your “comfortable” number.

    This is like putting yourself on salary and will make your life so much smoother.

  14. Melissa D says:

    Maybe I’m splitting hairs, but to me “budget” is not at all the same as recording what you spend. Recording is important, but actual budgeting begins when you actually set aside set amounts for specific spending or saving purposes. You can’t do this very well without recording first, but my problem in college and my twenties was recording and knowing what I spent and yet never translating that to the next step: budgeting with limits and specific goals in mind.

  15. Belinda says:

    Up until I got divorced a few years ago, I was never responsible for paying any bill. Therefore I had no idea how much the electric bill was, or water, or garbage collection, etc. I immediately had to learn by fire. Math has never been my forte, which is why I never handled the finances. But I quickly learned just what Trent said – you don’t have to be good with numbers to keep a budget.

    The first thing I did was set up an Excel spreadsheet and began entering the dollar amounts for the bills as they came in. It took me a few months to get a true representation of what my expenses were. After being blind-sided with a $30 oil change every quarter, I learned to add $10/month to my budget for it. Ditto for dental cleanings, etc.

    It took me a very long time to learn how to manage my money, starting late at the age of 35! But it has been well worth it, and if I can do it, so can you!

  16. Piggy Bank says:

    Carrying around a small notebook seems to do the best for me. Doing that for just a month has gave me tons of insight on small amounts being spent at a gas station getting a soda or treat or grabbing something off of the dollar menu. Then I found ways I could cut back in this area. Then I decided to monitor my spending this way in all kinds of categories. It is amazing how much I can save by just cutting out a few expenditures per category per month.

  17. HW says:

    I think our budget has helped my husband and I in three big ways: 1) realizing how much things actually cost, 2) helping us save for big expenses and 3)helping us control spending.

    Our budget is basically a way to help us keep track of what we spend. At the end of the month or year, we know how much we actually spent on groceries, eating out, medical bills, and other expenses that can vary a lot throughout the year. Because we know approximately what each expense will cost each year, we know how much money to set aside each month for large but infrequent expenses like home improvements or our car insurance, which we pay only once a year. Lastly, in areas where we are spending on a “want” instead of a “need” (like eating out and entertainment) we have set a goal on how much (or how little) we spend on that area each month. Then if we want to go out to eat and we have the money left in the budget, we know we can. If we’ve already gone out to eat a few times and there’s not money left, we stay in. We let our monthly budget amounts accumulate throughout the year, so then we can save up and spend more one month if we spent less in previous months. This has worked very well for us enables us to live within our means and save money.

  18. Holly says:

    My husband and I just set up our budget a few weeks ago- with realistic numbers on what we think we actually spend in all of the categories we could think of. It has already helped me because I have had the urge to make purchases (impulse buys, usually) that didn’t have a category. It was easier to say “I probably don’t NEED it if it doesn’t even have a category. That would get me through the impulsive stage and I would walk right by the item. Budgeting can help!

  19. Julia says:

    I also get paid every two weeks. So I base my monthly budget on 4 weeks of pay. This way, I get an extra paycheck twice a year.
    I also budget so my spending is a month behind my earning. That way, if I overspend one month I can make it up the next month. Also, if I lose my job I won’t feel the income loss for about a month. That gives me a little time to severly cut back.
    It works like this: I got paid on the 13th. I put that check in a safe place and leave it there. I’ll get paid again tomorrow. The 2 checks on get this month are my spending for next month.
    Tomorrow is close enough to the first of the Sep that I’ll deposit both checks and schedule payments for bills due Sep 1st.

    I helped my sister build her 1st budget. She also got paid every two weeks, but she was living paycheck to paycheck at the time. So we used a calendar. On the days she got paid, we marked a positive amount for what she typically earned. Then we marked each bill as a negative amount about 5 days before it was due. Calculated what she spent on gas and groceries each week and marked that as a negative on each Saturday. On every Sunday, we marked her balance. Then we decided how much she could put into savings and marked it as a negative on that day.
    The goal was to keep her balance positive. If it looked like the balance was going to go negative on an upcoming week, we would reduce the grocery money for that week and she would raid my parents’ pantry, invite herself to my sisters’ homes for dinner, and/or look for ways to make a little extra by babysitting or something.
    Last I talked to her she was still using that calendar system.

  20. Stella says:

    I actually like seeing what I buy with my money, so I use a Word Document to write down everything I spend money on, on a monthly basis. I don’t get so specific as to mark the price of each item, but rather each time I make a purchase. I underline purchases I feel extremely good about, so I can study that at some later point in time so I know what I enjoy spending my money on the most.

    I have a section at the top that summarizes my spending goals subtracted from my salary (after taxes). The end number is my savings goal (1/3 of my salary). I have categories of Utilities, Travel, Food, Pets, Household, and Etc. I update my budget daily. I don’t have a hard rule that I can’t buy anything once I run out of my money in my budgets, but since I am highly aware of what I spend, I have a very good idea at what I can afford to do on a monthly basis.

    I’m on track to save $5000 this year from 9 months salary. This is probably only possible because I have no debt.

    I have used this system since I graduated college and had income. I did not keep track for a few months in 2009 because I was unemployed and was just taking money out of my savings… that was too depressing and I was spending as little as possible as it was.

  21. Pat Chiappa says:

    I agree with most folks comments about how budgets are personal, what works for one may not work for another, etc.

    But I want to add is that CREATING your budget and IMPLEMENTING are two different things. Even if you like spreadsheets, numbers, math and so on, you still have to follow the budget.

    So in the end it’s the discipline one needs in budgeting – more than the skills/interest towards numbers and accounting.

  22. Landon says:

    The way I budget is this:

    I calculate my can’t live without, recurring expenses (rent, food, etc.). I calculate my recurring income. I subtract the two to get my weekly profit. I then give myself a small percentage of that profit to spend on anything I want. The rest go to savings. Every week I accumulate more spending money (the previous week’s balance rolls over). I called this the Ebenezer Method on my blog.

    To be even more hardcore, I use the PearBudget spreadsheet and set monthly spending goals. If I fail to meet those spending goals, I penalize myself by subtracting the difference from my spending money.

    This method has worked very well for me and has increased my savings as well as taught me patience in buying the things I want to buy.

  23. I like your advice about focusing on a specific area or two with your budget in place. I find myself getting overwhelmed by all the areas that need attention in my budget. This idea about focusing on just 1 or 2 areas I think will really help me overcome some of the problems I have in my budget. Thanks.

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