How to Create a Budget. Step 2 – Keep Track of Expenses

The other day I posted an article explaining why you need to create a budget. Some of the reasons included:

1. To accomplish a financial goal
2. It will help us handle “shocks” to our finances
3. To identify areas of waste
4. To ensure that any surplus is not spent on frivolous items
5. It will help you develop discipline

In the first step, we examined various methods of tracking and projecting your income. Today we are going to look at the second step in creating a budget – tracking expenses.

Using your bank/credit card:

Many people (like me) use their debit card exclusively for purchases. They hardly carry any cash, and will have to think long and hard to remember their ATM passcode. Some people even pay for everything with their credit card (in order to get rewards) and then pay the bill in full at the end of the month.

If this describes you, then tracking your expenses and creating a budget should be pretty easy. Basically, what you will need to do is link your bank/credit card accounts to financial software and let it do the tracking for you. Here are a few free options:

Mint – This is by far the most popular free budget software on the market. Everything is done online, which means that you can access your information from any computer. Mint was recently purchased by Intuit (the makers of Quicken), but they have promised to keep it free.

It is very user-friendly, and it only takes a few minutes to get started. Mint has tons of great graphs and charts to help you visualize your spending. It also helps you set and achieve financial goals, and can even track your investments.

Money Strands – This is another online option that is completely free. It is also user-friendly, and provides graphs and charts to help make it easier to see the big picture in your finances.

Pocket Smith – PocketSmith uses a very unique approach in tracking expenses. They use a calender-based method, where the scheduled events are financial. You can still link your bank and credit card accounts and use that information to track your expenses. However, this goes a step further and takes your scheduled paychecks, bill payments, rent, grocery and gas bills, and other planned spending, and creates a forecast.

This will be extremely useful for those who have unstable or infrequent income and/or expenses – such as those who are paid tips or commissions.This software can sync to all of the popular calendar applications (MS Outlook, iCal, Google Calendar and iPhone), and you can even use Twitter and SMS to track your expenses!

PocketSmith has one free and two premium versions for you to choose from.

GnuCash – This is another free software, but unlike the others, it is downloaded to your computer. It is open source – which means that updating and improving the software is a community effort – and handles a lot of finance and basic accounting functions. You can also import information from your bank, and track your expenses in order to create and manage your budget. However, out of all of the programs listed, this one is the most difficult to navigate (but has a ton of features).

All of the programs listed above give you the ability to import your bank or credit card transaction data, group those transactions into budget categories, and come up with a realistic budget. You just have to try them out and see which one works best for you.

I will post full reviews of each program in the near future.

What if I use cash for many/most of my purchases?

I’m glad you asked. If you use cash, all is not lost. Here are a couple of viable options:

Microsoft Excel – I LOVE Excel. I use it for just about everything. It gives you complete flexibility in how you manage your financial data. Excel allows you to create charts and graphs, perform any mathematical function, easily share data, and even use your smartphone to track your spending.

You can write comments and notes regarding your spending for stuff you won’t remember 3 months from now. Also, virtually all financial institutions (except for the most bootleg companies) will allow you to download your data into Excel (actually CSV format, which can be opened by and saved with MS Excel).

Another great thing about Excel is that there are a ton of free budget templates – made by Microsoft and private individuals – and tutorials available online (of course if you need help setting up a budget in Excel, feel free to contact me). Use this personal budget template to start with.

One negative thing about Excel is that you will have to assign categories manually (unless you can write a complicated macro) each time you download or enter data.

Envelope System – This is a fairly popular method of controlling spending. At the beginning of the month you take your cash and divide it into envelopes – that represent your various budget categories – and once the money is gone from the envelope, you can’t spend any more on that category (or you must take from another envelope).

For instance, if you only want to spend $100 on eating out, just put $100 in the “eating out” envelope (pretty clever, right?).  Once the $100 is gone (sure could go for 100 tacos right about now!), you are done eating out for the month. If you still desire to eat out, you must take money from another category’s envelope (such as entertainment) and decrease your spending for entertainment for that month.

So, this is great if you already have an established budget and want to manage your spending.  But how can you use this when you are just getting started and don’t know how much to put in each envelope? Wow, you are just full of great questions today!

Here is my suggestion:

Take your discretionary income (money left after paying taxes and mandatory bills), and come up with estimates of how you usually spend the money each month. Put those estimated amounts into your envelopes and start spending! Every time you purchase something,take the receipt and put it in the envelope. Then at the end of the month, add up the receipts – or just see how much you have left and subtract it from what you started with. Just be sure to keep track of when you add cash to an envelope.

photo credit: patrick h. lauke

This will serve two main functions…

1. It will help you achieve your primary goal of tracking your expenses so you can see how much you spend each month.

2. And it will serve as an eye-opener regarding some of your spending categories. Many people tend to underestimate their spending on categories that usually call for small, frequent purchases (such as lunch or dining out). So if you put $50 in your eating out (does it seem like I’m picking on eating out, or is it just me?) envelope, and you have to refill it with cash 5 times during the month, then you can zero in on that category when evaluating your spending.

For cash users to be most effective, I would suggest combining these two methods. Use the envelopes as a way to track your expenses and then use Excel to store and analyze your spending. This way you get the best of both worlds.

Are you currently using one of the above methods to manage your finances? Any horror stories?

Do you think you would be shocked to know exactly how much you spend in certain categories?

I look forward to your comments below.

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photo credit: Steve Wampler