Old-school personal finance books tell you that if you just create a budget and stick to it, then — POOF! — all your money problems will be solved instantly. But anybody who has ever tried budgeting knows that’s not how it works. Even if you jot down every penny you spend for 30 days, and try to stay within your means, sometimes things don’t always go as planned and you may find yourself spending a bit more than you originally budgeted for. Over the past five years, I’ve done a lot of trial and error when it comes to budgeting. I’ve set monthly budgets, annual budgets, and weekly budgets. I’ve tracked my spending using paper and pencil, worked off of spreadsheets, and downloaded a few apps to aid in my quest to own my budget So, today, I’m going to show you what actually works. While each person’s journey will be different, these budgeting tips are really meant as a blueprint to get the ball rolling on managing your spending.
Step 1: Stop budgeting. Come up with a simple spending plan instead
Okay, I know you probably read that and thought, “but this is an article about how to start budgeting.” I know… but hear me out. Monthly budgets are often useless because we tend to underestimate our expenses. I never keep up with them, and I’m a financial blogger — a total nerd about this stuff. So I don’t expect you to. There are some things you just have to pay for each month, like rent (or a mortgage, if you have one), transportation, utilities, food, and debt payments. Then there are miscellaneous expenses, like car repairs, home improvements, vacations, and insurance payments. For you, these miscellaneous expenses may only be 10% or so of your total spending. But for me (especially after becoming a homeowner) they’ve crept up to more like 30% (home repairs and renovations aren’t cheap). And here’s what this means. Accounting for, and “pre-spending,” every dollar you make can be a financial mistake. If I take my annual take-home pay (aka my salary after taxes), divide it by 12, and proceed to spend that amount every month, I’m going to be in trouble when that unexpected car repair expense comes up or when I’m doing my holiday shopping. So what you need to do is stop obsessing over the detailed, track-every-penny budgets you’ve always been told were the solution and instead, implement a simple spending plan.
What is a simple spending plan?
A simple spending plan is an easy way to budget that helps you save money, get out of debt, and pay your bills on time — while still allowing you the freedom to spend money on things you value. Instead of focusing on pre-spending every dollar tightly, a simple spending plan emphasizes the need to recalibrate your budget each month (aka it’s fluid). Why? Because expenses can go up and down, especially now that inflation is at its highest point in 40 years, and things are getting pricier by the day. And I’m not the only one who says this. I once read in a personal finance publication that the best way to reduce financial stress is — you guessed it — to stop budgeting. Here’s the quote for reference:
“Money (or its lack) is the nation’s most common source of stress, reports the American Psychological Association. Making a detailed budget — a widely advised fix — only makes things worse, says Cleveland financial planner Kenneth Robinson, based on a decade of work with clients; the problem is that people hate to think about where they’ll need to cut back.”
In other words, a rigid monthly budget is basically a recipe for disaster. You should think about each month as a blank canvas, where you adjust your spending as needed. Otherwise, you’ll get frustrated and possibly go off the rails as far as your budget is concerned.
Step 2: Track your spending — the easy way
Forget about manually tracking every penny. The goal is to set up a system that keeps track of all of your spending digitally, without any additional work from you, so you can access it if and when you need to. You can do this easily by using the single-card method. This is when you use just a single debit or credit card for all of your purchases — or as close to all of them as you can — and let technology do all the tracking for you. One of the best ways technology can help your wallet is by eliminating the need to use cash, and therefore, eliminating the need to keep track of our cash expenses. Now, this is counterintuitive to what a lot of old-school financial gurus say about using cash as a mechanism to help you spend less. While that’s partly true, the fact is that cash can also get lost or stolen. And, more importantly, cash is being phased out by the day. Electronic payments are here, like it or not, and the times you need cash (for anything) over a debit or credit card are fewer and fewer. But the best thing about using a credit or debit card is that you automatically have a record of all of your spending.
So should you use credit or debit?
If you have a tendency to buy things first and figure out how you can pay for them later, stick to a debit card, as that will keep you out of financial trouble. But if you’re comfortable with a credit line and only charging what you can pay back in full each month, credit cards are more useful than most debit cards — especially if tagging and categorizing your purchases is important to you. With most cards, you can even export your transactions to a spreadsheet —which for the nerds like me, is where the fun begins. This spending report can be of major help when getting down to the nitty-gritty of budgeting, giving you a record of every penny that you spend using your card. I can think of one card, in particular, the Chase Freedom Flex℠, that makes it incredibly easy to keep track of your spending, especially when it comes to your quarterly 5% bonus categories. By logging onto Chase Ultimate Rewards®, you can easily see how much money you have dished out in each of the categories that you activate, as well as how much of your $1,500 spending limit you have left. If you are looking for a full picture of your spending, Chase offers that as well. Better yet, many credit card companies reward you just for making purchases with their card. This typically comes in the form of cash back or travel rewards, which can help you put some money back into your checking account or help cover purchases for your next vacation. If you are considering a credit card but your credit score is less than perfect, we recommend the Capital One QuicksilverOne Cash Rewards Credit Card. This card offers 1.5% cash back on every purchase, which you can redeem for cash, gift cards, or statement credits, allowing you to make the most out of every dollar spent. However, what I think is most beneficial, especially for those who are first-time cardholders, is the ability to access your monthly recurring transactions. This makes budgeting or eliminating excess spending easier than ever. Read more: The best credit cards right now
Use budgeting apps
If the single-card method isn’t for you, try using a budgeting app. Instead of manually evaluating your spending to make sure you stay on track, budgeting apps monitor and analyze your spending. This, in turn, can make it easier for you to see where your money is going, and adjustments you can make to improve your cash flow. One of our favorite budgeting apps is Mint, which connects to all your financial accounts to help you monitor your spending. The Mint app allows you to set financial goals and you’ll receive updates and reports to let you know how much you’ve progressed. Personal Capital is another great budgeting app to check out. This app is especially useful if you want to add investing to your financial strategy. As with Mint, you’ll link your financial accounts to Personal Capital and wait for the app to start gathering data from the money you’re spending. But while you’re budgeting and managing your money, you can also take advantage of Personal Capital’s expert advice to build an investment portfolio.
Step 3: Know your fixed expenses
Setting up a personal finance app or downloading all of your credit card transactions is great for historical analysis of where all of your money goes. Looking forward, however, this data is less important. What you need to know are your fixed monthly expenses. These include things like:
- Your rent or mortgage.
- Loan payments (student loans, auto loans, etc.).
- Minimum credit card payments.
- Desired savings, investments, or additional debt payments.
That last point is especially important. It’s vital that you calculate how much you want to save, invest, or use to pay down debt first. To find what’s left, do the following:
- Total your fixed monthly expenses.
- Figure out your monthly take-home pay.
- Subtract your fixed expenses from your take-home pay.
This is what’s left to spend, also called your “spending allowance” (which we’ll talk about below). You can spend this on whatever: take-out, wine, travel — basically anything that makes your heart sing. Of course, if something big happens, you may need to spend money on that and have less for fun stuff. That sucks, but it’s also why you should always have an emergency fund. Then there’s the issue of having no leftover money. What do you do then? Take deep breaths — you got this. If money is tight, it’s likely there won’t be much (or any) left to spend after you’ve laid out your fixed monthly expenses and what you hope to save. In the short term, you can reduce but not eliminate your savings goals, while at the same time trimming spending. When trimming expenses, think about the big stuff, like housing and your income. Here are some tips to help you save money in those areas:
Step 4: Put all your money on autopilot
I first read about putting my money on autopilot over 10 years ago in “The Automatic Millionaire” by David Bach. The entire book is devoted to setting up automated systems to manage and invest your money. This does two glorious things:
- It eliminates worry. You stop wasting time thinking about stupid things like, “Did I pay the electric bill this month?”
- It protects you from yourself. Automated finances make it harder for you to sabotage your money. No more late credit card payments (and the associated fees and damage to your credit score). No more skipped IRA contributions. And on and on.
The idea of automating your finances isn’t new. In fact, another writer who has taken the idea of automated finances to the next level is behavioral finance guru Ramit Sethi. He lays out simple plans for automating your personal finances on both his blog, “I Will Teach You To Be Rich”, and in his book by the same name. He’s a vocal advocate of what so many other financial “experts” for some reason refuse to acknowledge. We don’t want people telling us to just “set up a budget” and “cut back on lattes” — the latter is a direct jab at Bach, who trademarked the term “Latte Factor” to describe how a daily coffee habit can eat into long-term wealth. Instead, we want to be able to spend our money consciously, even when that includes things we want. And the key to that is automation. Read more: Put your money on autopilot
Step 5: Spend the rest without worry by using a spending allowance
Any extra money that you have left after your monthly expenses and savings is what I call your spending allowance. It’s how much you can spend this month (on whatever you want) without worrying. Using whatever method you’ve set up for autopilot spend tracking, you can keep a simple eye on how much of your spending allowance you’ve used for this month. For example, by using the single-card method for all of your day-to-day spending. This is what I do: my household’s spending allowance is $2,500 a month. I eye our credit card balance throughout the month, and if it reaches $2,000 too far before the end of the month, for example, I know it’s time to ramp down the spending a bit.
Here’s the main takeaway of this article: budgets are overrated. They create stress and, many times, we simply don’t stick with them. Instead, try having a spending plan in place, and adopt a fluid approach to money that allows you to adjust your spending as you go. Finally, try automating all your finances. That way, you’ll have an overall view of where your money is going and allow you to assess opportunistic ways to save or invest.