If you’re a frequent reader of the Best Interest–thank you!–you’ll know that I’ve previously shared my opinions about budgeting. You can read more about it here. Since I’m just one guy with one opinion, today I’m going to share how experts budget
It struck me recently that you probably aren’t a data zealot like I am. My budgeting method might not work for you. I’ve tried to get friends, family, coworkers to use the methods I use…they all felt it was a bit too hands-on and complicated. Maybe I should listen to them?
I think you might be interested to learn about real budgeting techniques that actually work for real people.
So I put up my Bat Signal and asked other financial writers about their budgeting habits. They responded! (…another thank you!)
While this isn’t a double-blind study with thousands of data points, there are some fantastic inferences to take away. I hope you learn as much as I did.
Budgeting vs. Tracking: the two key behaviors in expert budgets
There are two main behaviors I’ll refer to from here on out: budgeting and tracking.
Budgeting is the process of setting limits on your spending. Typically, it’s done via categories, or giving specific dollars a “job” to do.
Jesse took $200 from his recent paycheck and budgeted it towards next month’s groceries.
Tracking is the process of recording purchases and expenses.
After the trip to Wegmans, Jesse tracked the $70 receipt. Combined with his other shopping trips, he’d spent $225 on groceries this month.
While I get into this level of detail in my budget—specific expenses in specific categories, every time I spend money—I learned that I’m an outlier! This isn’t how experts budget, most of the time. Instead, most other people use far simpler methods of budgeting and tracking.
As you’ll see below, some folks budget, but don’t track. Other folks track, but don’t budget. Many people do both, but do so infrequently (every month or so).
Plan the work: Budget, but don’t track
This was the most uncommon response I got, but it can work. A Dime Saved blog uses the “Envelope system” to budget without any tracking. In its original form, the Envelope system literally involved placing cash bills into different labeled envelopes.
Need groceries? Grab cash from the Grocery envelope.
Trip to the movies? Grab a $20 from the Fun envelope.
No money left in the Dining Out envelope? Then you can’t dine out. There’s no funding for it!
That’s exactly why the Envelope system works without tracking. You can’t overspend a category, because you simply won’t have money in that envelope to spend. Or, as A Dime Saved describes it, “It’s pretty much all on auto-pilot.”
Nowadays, the Envelope system is frequently utilized in electronic budgets. I use it via the YNAB app. However, since it’s digital, the YNAB envelopes aren’t physically real, and aren’t filled with actual cash. That’s when Budgeting with Tracking systems make sense.
Data Fanatics: how experts budget + tracking
A lot of the bloggers I spoke with described their use of long-term budgets with follow-up tracking. Capture the big data, don’t sweat the details. It’s a great example of Pareto thinking. Do 10% of the work, but still get 90% of the results. I like that efficiency.
Before I get into the digital options, let’s talk pen and paper. Melissa from Perfection Hangover has been using her handwritten planner for 8+ years! It’s a physical book with folders that combines incoming and outgoing dollars all in one place. Melissa comments, “Even though I’m the one who handles the bills in our house, my husband could easily look through the organizer and see what is to be paid on any given date.” Spreadsheets and apps can require some tech savvy, but this planner simply requires the ability to read.
Gary at Super Savings Tips has a long history too…10+ years of tracking in Quicken. That historical data enables him to budget annually and track monthly. And he treats the household budget “like a business.” Gary explains his family “modeled our budget plan like a profit and loss statement a business might publish and split it to show a 12 month plan and actual history. We can compare it then to last year and all previous years.” Gary’s got an MBA: Mastery of Budgetary Awareness.
That said, some people don’t even write their budget down. Mr. SR at Semi-Retire Plan plans his budget verbally twice per month with his partner, and then compares weekly spending against that budget. It lets them “work towards [their] saving goals [and] get the benefit to [their] marriage of being on the same page for the following two weeks.” It’s not a meeting with lawyers and accountants, it’s just a chat. What bills are coming up, what fun events with associated costs, etc? Talk it out, budget that money, and then track it afterwards.
The Keeping Up with the Bulls blog and Marc from Vital Dollar both use spreadsheets to rough out monthly budgets, and then compare their end-of-month bank accounts against what they’d budgeted. This simple method has allowed KUWTB to “end up under budget even with unexpected expenses” most years. Marc has a variable income each month—I thought this was very interesting. As such, Marc says “there are good months and bad months. We track our expenses to make sure that we have a fairly steady standard of living and things don’t get excessive when the income is good.” Budget conservatively, then track one time per month to make sure you’re keeping lifestyle inflation in check.
Peter from Counting Every Dollar avoids the specific categories in his budget/tracking method, too. For him, “it’s a conscious decision to not micromanage and burn out on the long journey.” And the Best Interest definitely values enjoying that journey! Again, this is the Pareto principle at work. Do you care that you spent $7 on pickles? Do you care that you spent $280 on groceries? Or, is it most important that you spent $2000 total last month? The answer will be different for each reader. But Peter, like many of the other writers here, is able to capture a significant financial pulse using infrequent-but-encompassing data points.
If you’re paying down debt, like Enoch from Savvy New Canadians, then a budget-and-track will help you “tighten up every expense item” to the utmost extent. The longer you’re under that debt monkey, the more bananas it steals. Smart thinking, Enoch!
I use YNAB, and so does Natalie from Go from Broke. YNAB works tremendously well, but also asks more of its users than most other systems. Like other envelope systems, Natalie points out that YNAB suggests you “only budget what you have, not what you expect.” Importantly, the YNAB interface makes it easy to ask yourself “what does this money need to do before I get paid again?” Some downsides of YNAB are that it’s subscription based (~$12/month) and takes time to learn. But it’s worth it for me, and I highly recommend it. Yet, when I compare YNAB to the various other methods described in this section, I’d say that all the other bloggers are doing significantly less busy work than me. Definitely some food for thought…
Onto the last “good” section!
Just checking: Tracking, no budgeting
The thought process behind these methods is simple: budgeting is predictive, and therefore far less important than tracking your total amount of actual spending. Total spending, when compared to your total income, gives you all the data you need to make informed decisions. I heard this theme over and over from this “Trackers only” group. In this case, the answer to how experts budget is that…they kinda don’t!
Mr. “The Poor Swiss” says, “I found out over the years that the limits in themselves were not as useful as tracking expenses.” The limits, in this case, are the amounts you set in your Budget. The Budget, by definition, is a hypothetical limit that you place on yourself. Whether you’re over, under, or right on target…that’s all dependent on your actual spending behavior. And Tracking is what records that actual spending behavior.
Jarek at Time in the Market sets up savings goals—not spending limits—and then uses monthly tracking to ensure those goals are met. The goals are vital, it seems. In fact, Jarek writes that the “goals motivate me to cut back when I’m overspending more than anything I’ve ever tried.” Are you a goal-oriented achiever? Maybe this could work for you.
Kevin at Just Start Investing operates on a similar system. He tracks his spending once per month. Kevin writes, “I keep a rough pulse on my spending and know if I need to reign it back a little to make sure I am hitting an appropriate savings number.” No micromanaging to the point of frustration. Just an occasional course check, readjusting as needed.
I’d paraphrase Andrew at Wealthy Nickel, but his explanation of his family’s monthly tracking system is succinct and on-point. He writes:
“If you’re living paycheck to paycheck, I think our budgeting system would be too lax, but it works for us and our situation perfectly. We are at the stage where we have ingrained frugal habits and live below our means, so I am more interested in making sure our overall expenses stay in line and our savings rate and net worth keep going up.”
Well said, Andrew!
There’s plenty of other great advice out there. For example, Dave from Wealthlenial emphasizes avoiding the “Two Income Trap.” Dave and his wife limit spending to only one of their two incomes. This provides two great benefits. First, they save more money—plain and simple. But second, it gives them a lifestyle buffer should Murphy rear his ugly head and they go down to one income. It’s a safety net. If they were pushing their two incomes to the limit, then one person losing their job could be catastrophic! They’re avoiding this scenario via careful budgeting.
Ask yourself: if you or your significant other lost their job, would you be able to pay the mortgage, cover the bills, put food on the table? If not, there might be some extra spending in your budget that’s dragging you into the “Two Income Trap.” Be careful!
Ignorance is bliss: no budget, no tracking
…said nobody! This is certainly not how experts budget.
Every respondent used some form of budgeting or tracking. Every. Single. One. Ignorance is STRESS!
That might be the most important takeaway from this entire post: these people—who all really care about positive financial health—find that budgeting and/or tracking should be used as a consistent benchmark to inform future spending. If this is how experts budget, then maybe that’s a sign!
As I mentioned weeks ago, one of the largest sources of financial unhappiness is not knowing your financial status. It’s that simple. The act of informing yourself—via budgeting or tracking—will likely shed light on the dark corners of your financial life. And that light provides a new perspective, one that can be acted upon. Once you know where you are in the world, you’ll feel less confused and more content.
I hope you learned something useful, applicable, to your lives. If this is how experts budget, maybe I should incorporate these ideas too? What do you think?
Thanks for reading the Best Interest.