Budgeting Is Too Complicated. Here's a Better and Easier Way.

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Everyone needs a budget, but in my experience most online budgeting tools are focused on helping fix poor spending habits--something not every family needs. They’re also overly detailed, providing dozens of spending buckets to allocate each and every dollar.

While a "nickel and dime" approach to budgeting may be necessary for some who have spending habits to change, a lot of families don’t need it.

I used to be a budget hawk, accounting for each and every dollar leaving my checking account ad nauseum, down to the last $1.50 convenience store Dr. Pepper. After several years of coming in under budget month after month, I wondered if it was worth the work.

What was I really trying to accomplish with my budget? I’ve said before that budgeting isn’t about being cheap, it’s about doing meaningful things with your money. This means freeing up the money you need to and putting it in the right places. It stood to reason then that as long as my family had money set aside for the meaningful stuff--our financial goals--then it didn’t really matter where the rest of the money went.

That’s the catalyst for my new, simpler budget.

A Sensible Approach to Budgeting

After doing some research I came up with a budget solution for those who don’t have traditional budgeting needs. It keeps the importance of tracking financial goals without having to watch each and every expense--in fact, there are only two budget expense categories: Essential Expenses and Non-Essentials Expenses. These are extremely broad, but all you’re trying to know is what’s left at the end of each month to allocate to your financial goals.

With this approach you can either use a spreadsheet or an online budgeting tool like Mint. Heck, a pad of paper works fine, too. In my process below I’ll describe how it works with Mint (assuming you have a basic understanding of the tool).

The Steps to Creating Your Simplified Budget

1. Link up your checking account and credit cards. This will bring all of your income and expenses into Mint--allowing you to see these all in one place. This “account aggregation” feature is what makes tools like Mint so great.

2. Determine your “Essential” monthly expenses. These are expenses that provide for the essentials of life (a modern life anyway). Here are some typical examples:

  • Rent or mortgage payment
  • Groceries
  • Utilities
  • Mobile phone bill
  • Internet
  • Gasoline
  • Loan payments

(Note: Taxes, health insurance premiums, HSA contributions and other expenses paid from your gross wages don’t need to be listed here.)

3. Identify your Essential expenses. You can estimate this by looking at your credit card or checking account statements from the past 3 months and taking the average if needed. Your mortgage probably doesn’t change month to month, but your grocery bill does. Once you have the amount for each, note the amount for each expense (Mortgage = $1,000, Groceries = $500, etc) and add them all together in one total amount.

4. Create a budget category for all Essential expenses. The amount from Step 3 ($2,000, $6,000, whatever) is your Essential expenses budget amount. Create a budget category within Mint called “Essential” and delete all other budget categories. You don’t need them.

5. Determine your Non-Essential monthly expenses. These are expenses that you can mostly do without, or at least cut drastically. Here are some typical examples:

  • Clothing
  • Shopping/Electronics/Toys
  • Dining Out
  • Entertainment
  • Vacationing
  • “Miscellaneous”

6. Identify your Non-Essential expenses. Same as Step 3, but this time you’re estimating your Non-Essential spending amounts and finding out your total Non-Essential spending budget.

7. Create a budget category for all Non-Essential expenses. As with Step 4, determine your regular level of spending for your Non-Essential expenses and create a “Non-Essential” category in Mint.

8. Assign Your Expenses. With your two budget categories created, go into your credit linked card and checking accounts and assign all current months’ expenses to either Essential or Non-Essential categories, using Steps 2 and 5 as your guides.

After following the process, you have a budget that looks like this:

   Income
- Essential Expenses
- Non-Essential Expenses
= Remaining for Financial Goals

Ideally we want every dollar “spent” or allocated somewhere. If you have $1,000 left at the end of each month, figure out how much of it to tie to a financial goal and move it. Stick $400 in a Roth IRA, use it to pay down a credit card or your mortgage, or save it for your kid’s college--it’s up to you. Just make sure it goes somewhere with a purpose.

You'll know your budget needs a closer look if Mint shows you in the negative at the end of each month. If you're a disciplined saver deficiencies like this won't happen month after month.

If you find yourself in the negative each month, start with a more detailed look at your Non-Essential spending. What can be cut? How often are you going out to eat? How much are you spending on unnecessary electronics or other toys?

If you’ve cut all you can from Non-Essential spending, look at your Essential spending. This budget tends to be harder to make cuts--hence the name--but it can be done.

If you find you’re having to make drastic cuts to your Essential spending, the answer is typically to earn more money. Just make sure that a big chunk of your extra earnings are going toward your financial goals--which is the whole point of budgeting in the first place!

Budgeting Adjusting Priorities

  1. Decrease Non-Essential Expenses
  2. Decrease Essential Expenses
  3. Earn More Income

I hope this new look at budgeting is helpful to you. Most budgeting tools and methods are well-meaning, but users can quickly get lost in the complexity. With budgeting you’re trying to accomplish one thing: Have money left over to achieve your financial priorities. I hope this approach can help you do so more easily.

If you'd like help putting a budget together for your family or business, contact me here to discuss your family or business budgeting needs.